SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   -----------

                                   FORM 10-KSB

(MARK ONE)

       [x]         ANNUAL  REPORT UNDER  SECTION 13 OR 15(D) OF THE  SECURITIES
                   EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2000

                                       OR

       [ ]         TRANSITION   REPORT  UNDER   SECTION  13  OR  15(D)  OF  THE
                   SECURITIES  EXCHANGE ACT OF 1934 FOR THE  TRANSITION  PERIOD
                   FROM       TO
                       ------    ------
                           Commission File No. 1-13851

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                                   SONUS CORP.

                 (Name of small business issuer in its charter)

             YUKON TERRITORY, CANADA                 NOT APPLICABLE
         (State or other jurisdiction of    (I.R.S. employer identification no.)
         incorporation or organization)

            111 S.W. FIFTH AVENUE, SUITE 1620            97204
                PORTLAND, OREGON                       (Zip code)
    (Address of principal executive offices)


                                 (503) 225-9152
                (Issuer's telephone number, including area code)

         Securities registered under Section 12(b) of the Exchange Act:

        Title of Each Class            Name of Each Exchange on Which Registered
        -------------------            -----------------------------------------
   COMMON SHARES, WITHOUT NOMINAL              AMERICAN STOCK EXCHANGE
         OR PAR VALUE

       Securities registered under Section 12(g) of the Exchange Act: NONE

                                   -----------

         Check  whether  the issuer:  (1) has filed all  reports  required to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

         Check if no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B is contained herein, and no disclosure will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]


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         State  the  issuer's   revenues  for  its  most  recent   fiscal  year:
$43,959,000.

         State the aggregate  market value of the voting and  non-voting  common
equity held by  non-affiliates  of the registrant,  computed by reference to the
price at which the common equity was sold, or the average bid and asked price of
such common equity, as of November 10, 2000: $17,029,169.

         State the number of shares  outstanding of each of the issuer's classes
of common equity: Common Shares, without nominal or par value, 6,095,706 shares,
as of November 10, 2000.

         Transitional Small Business Disclosure Format: Yes [ ] No [X]

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of the issuer's definitive Management Information Circular and
Proxy Statement dated November 16, 2000, are incorporated by reference into Part
III of this Form 10-KSB.


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                                TABLE OF CONTENTS

                                                                            PAGE

PART I........................................................................3
ITEM 1.  Description of Business..............................................3
ITEM 2.  Description of Property..............................................9
ITEM 3.  Legal Proceedings....................................................9
ITEM 4.  Submission of Matters to a Vote
          of Security Holders.................................................9
PART II......................................................................10
ITEM 5.  Market for Common Equity and Related Stockholder Matters............10
ITEM 6.  Management's Discussion and Analysis or Plan of Operation...........12
ITEM 7.  Financial Statements................................................15
ITEM 8.  Changes in and Disagreements with
          Accountants on Accounting and Financial Disclosure.................33
PART III.....................................................................34
ITEM 9.  Directors, Executive Officers, Promoters, and Control Persons;
           Compliance with Section 16(a) of the Exchange Act.................34
ITEM 10. Executive Compensation..............................................34
ITEM 11. Security Ownership of Certain Beneficial Owners and Management......34
ITEM 12. Certain Relationships and Related Transactions......................34
ITEM 13. Exhibits and Reports on Form 8-K....................................34

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                           FORWARD-LOOKING STATEMENTS

         Statements  in  this  report,  to the  extent  they  are not  based  on
historical  events,  constitute  forward-looking   statements.   Forward-looking
statements  include,   without  limitation,   statements  containing  the  words
"believes,"  "anticipates,"  "intends,"  "expects," and words of similar import.
Investors  are  cautioned  that  forward-looking  statements  involve  known and
unknown  risks,  uncertainties  and other  factors  that may  cause  the  actual
results,  performance,  or  achievements  of Sonus Corp.  (the  "Company") to be
materially  different from those  described  herein.  Factors that may result in
such variance, in addition to those accompanying the forward-looking statements,
include  economic  trends in the  Company's  market  areas,  the  ability of the
Company to manage its growth and integrate new acquisitions  into its network of
hearing  care  centers,  development  of new or  improved  medical  or  surgical
treatments for hearing loss or of technological advances in hearing instruments,
changes in the application or interpretation  of applicable  government laws and
regulations,  the ability of the Company to complete additional  acquisitions of
hearing  care  centers  on  terms  favorable  to  the  Company,  the  degree  of
consolidation in the hearing care industry,  the Company's success in attracting
and  retaining  qualified  audiologists  and staff to operate its  hearing  care
centers,  the ability of the Company to attract  audiology  centers as franchise
licensees under The Sonus Network,  product and  professional  liability  claims
brought  against the Company that exceed its insurance  coverage,  the Company's
ability  to  collect  its  accounts  receivable  in a  timely  manner,  and  the
availability of and costs  associated with potential  sources of financing.  The
Company  disclaims  any  obligation  to update any such  factors or to  publicly
announce the result of any  revisions to any of the  forward-looking  statements
contained herein to reflect future events or developments.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

OVERVIEW

         The Company was incorporated under the laws of the Province of Alberta,
Canada,  in July 1993,  under the name "575035 Alberta Ltd." The Company changed
its name to HealthCare  Capital  Corp.  in October  1994,  when it acquired nine
hearing care centers in British Columbia. The Company did not begin operating in
the United  States until it purchased two hearing care centers near Santa Maria,
California,  in July 1996. By vote of the shareholders,  the Company changed its
name from HealthCare  Capital Corp. to Sonus Corp. in February 1998, and changed
its  jurisdiction of  incorporation  from Alberta,  Canada,  to Yukon Territory,
Canada, in December 1998. The Company, through its subsidiaries Sonus-USA,  Inc.
("Sonus-USA"),   Sonus-Texas,   Inc.  ("Sonus-Texas"),   and  Sonus-Canada  Ltd.
("Sonus-Canada"),  currently  owns and  operates 106 hearing care centers in the
United  States and Western  Canada.  Centers owned by the Company are located in
the states of Arizona,  California,  Illinois,  Michigan,  Missouri, New Mexico,
Oregon,  Texas, and Washington and in the Canadian provinces of British Columbia
and Alberta.

         In addition to its company-owned hearing centers, the Company operates,
through Sonus-USA,  a franchise licensing program called The Sonus Network, with
442 current locations.  Licensees are entitled to use the Sonus name and receive
other  benefits such as practice  management  advice and training,  group buying
discounts,  and  marketing  services.  There are  currently  281  Sonus  Network
licensees located in 43 states and the District of Columbia.

         The Company,  through its subsidiary  Hear PO Corp.  ("Hear PO"),  also
operates  as an  independent  provider  association  and  hearing  care  benefit
administrator.  Hear PO obtains  contracts to provide  hearing care  benefits to
managed  care  group  and  corporate  health  care  organizations   through  its
approximately  1,400  affiliated  audiologists  and sells Hear PO brand  private
label hearing  instruments.  Hear PO currently has contracts to provide  hearing
care benefits to over 57 million covered lives.

         Each of the hearing care centers  owned by the Company  provides a full
range of  audiological  products and services to hearing  impaired  individuals.
During the fiscal year ended July 31, 2000,  approximately  85% of the Company's
revenues  were  derived  from  product  sales,  including  hearing  instruments,
batteries,  and accessories,  8% were derived from audiological services, and 7%
were from other sources,  including The Sonus Network and Hear PO. Substantially
all of the  Company's  hearing care centers are staffed with  audiologists.  The
Company's  operating  strategy  is to provide  patients  with high  quality  and
cost-effective  hearing  care while at the same time  increasing  its  operating
margins  by  attracting  and  retaining  patients,   recruiting   qualified  and
productive  audiologists and hearing instrument dispensers,  achieving economies
of scale and administrative  efficiencies,  and pursuing large group and managed
care  contracts.  The Company  believes  that it is well  positioned  to provide
retail hearing rehabilitative services to consumers while simultaneously serving
the  diagnostic  needs of referring  physicians  and meeting the access and cost
concerns of managed care providers and insurance companies.

         The Company sells products through its internet site at  www.sonus.com.
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Products that can be purchased through  www.sonus.com include gift certificates,
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hearing instrument  batteries,  assistive listening devices,  hearing protection
items, educational materials, and audiology equipment, supplies and accessories.
Audiologists  and  hearing  instrument  dispensers  can  also  purchase  hearing
instruments for resale to their patients.  The Company  believes that e-commerce
poses  substantial  opportunities  for revenue growth and


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intends to continue to devote resources to enhancing its web site and increasing
product availability and differentiation.

INDUSTRY BACKGROUND

PROFESSIONALS  AND  CENTERS.  Hearing  instruments  may be dispensed by either a
dispensing audiologist or a hearing instrument specialist ("HIS"). Although both
audiologists  and  HISs  may  be  licensed  to  dispense  hearing   instruments,
audiologists  have  advanced  training in audiology and hold either a masters or
Ph.D. degree.

         The June 2000 issue of THE HEARING  REVIEW,  a hearing  industry  trade
journal,  indicates that  approximately  31% of HISs in the U.S. are at least 61
years of age,  33% are 51-60  years of age,  25% are 41-50 years of age and only
11% are age 40 or under,  compared to 8%, 30%,  46% and 16%,  respectively,  for
dispensing  audiologists.  The  Company  believes  that  many  HISs  are  facing
retirement  with  no  formal   "exit-strategy,"  a  situation  that  creates  an
attractive investment opportunity for the Company.

         The typical hearing care practice wields little  purchasing  power with
manufacturers, and must spread overhead over a relatively small revenue base. In
addition,  a typical  hearing care practice  often has  insufficient  capital to
purchase new  technologies  and lacks the systems and size  necessary to develop
economies  of  scale.  As  a  result,   the  Company  believes  that  dispensing
audiologists  and  HISs  will  find it  increasingly  attractive  to sell  their
practices to or affiliate with larger organizations, such as the Company.

         Managed care  arrangements may also favor the  consolidation of hearing
care practices.  Managed care organizations  contract with health care providers
such as the  Company to provide  health  care  services  and  products  to their
members.  These  organizations  seek to establish  relationships  with providers
whose offices are convenient for the  organization's  members and that can offer
quality  services  and  products  at  very  competitive  prices.   Managed  care
organizations  also  typically  seek  to  shift  some  of the  economic  risk of
providing  health  care to the  provider of the care.  This  shifting of risk is
accomplished in a number of ways,  including capping fees,  requiring discounted
fees,  or  paying  a set fee per  patient  irrespective  of the  amount  of care
delivered to that patient.  As managed care arrangements  become more pervasive,
the Company believes that hearing care  professionals  will have an even greater
need for the geographic reach, economies of scale,  information  resources,  and
management  expertise that larger organizations such as the Company can provide.
However,  managed care is not  presently a large part of the hearing care market
and hearing  care  products  and  services are likely to continue to be provided
predominantly on a private pay basis for the next several years.

HEARING IMPAIRED POPULATION. The number of persons in the United States who have
hearing loss is estimated to be  approximately  28 million and the percentage of
individuals  with  a  hearing  loss  relative  to  the  general   population  is
approximately 2% for those under 18 years of age, 5% for those between 18 and 44
years of age,  14% for  those  between  45 and 64 years  of age,  23% for  those
between  65 and 74  years of age,  and 32% for  those  over 75 years of age.  In
addition,  the American  Tinnitus  Association  estimates that  approximately 12
million American adults have tinnitus (a ringing  sensation in the ears) that is
severe enough to seek medical help.

         The  Company  believes  that the widely  recognized  demographic  trend
toward an aging population will increase the demand for hearing instrument sales
and audiological  services and that the demand for hearing  instruments that are
less visible and for newer and superior hearing instrument  technology,  such as
digital and  programmable  hearing  instruments,  will also contribute to market
growth.  In addition,  the Company believes that some individuals  forgo hearing
care  because  of the  stigma of aging  that can be  associated  with  wearing a
hearing  instrument and that the demand for hearing instrument sales and hearing
care  services can be increased by marketing  and  education  designed to reduce
that stigma.

HEARING HEALTH CARE INDUSTRY SEGMENTS.  The hearing health care industry serving
patients  with  hearing and balance  disorders  is  comprised  of four  distinct
service segments:

-        hearing   rehabilitation   services,   including  the   evaluation  and
         rehabilitation  of  persons  with  hearing   impairments  by  assessing
         communicative impairment and providing amplification;

-        advanced  audio-diagnostic  services,  including  the  neuro-audiologic
         evaluation and non-medical diagnosis of hearing and balance disorders;

-        industrial and  preventative  audiological  services,  including  noise
         level measurements, dosimetry, and hearing screenings; and

-        otolaryngologic   services,   including   surgery  and  other   medical
         treatment.

         The Company's hearing centers primarily provide hearing  rehabilitation
services,  which  include the  assessment  and  rehabilitation  of persons  with
hearing  impairments  through  the use of hearing  instruments  and  counseling.
Rehabilitation  services,  including  amplification  systems,  are  provided  by
audiologists and HISs. The services offered include the diagnostic  audiological
testing, fitting and


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dispensing of hearing instruments, follow-up rehabilitative assistance, the sale
of hearing instrument  batteries,  hearing instrument  repairs,  and the sale of
swim plugs, custom ear plugs, and assistive listening devices.

         Advanced   audio-diagnostic   services   include  the   assessment  and
non-medical  treatment of vestibular and balance disorders and the evaluation of
patients with specific symptoms of an auditory or vestibular disorder, including
hearing loss,  tinnitus,  and balance problems.  In order to make a differential
diagnosis of hearing disorders,  an ear, nose and throat physician may employ or
refer patients to an audiologist to conduct special  diagnostic hearing tests to
differentiate between conductive, sensory, and neural pathology. If the cause of
the hearing loss is a medical  disorder in either the nervous system (neural) or
the middle ear  (conductive),  the physician  proceeds  with medical  treatment.
However,  if a non-treatable  conductive or sensory loss is found, the physician
will generally refer the patient to an audiologist for rehabilitation.

GROWTH STRATEGY

         The Company's  growth  strategy  involves  expanding its  operations by
selectively  acquiring  hearing  centers  located  in  existing  as  well as new
geographic  markets,  increasing  the number of  licensees  under the  Company's
franchise  licensing program,  and increasing the number of covered lives served
by the Company  under  managed care  contracts.  The Company  believes  that the
fragmented  nature of the hearing care  industry,  the absence of  industry-wide
standards,  and the inexperience  and limited capital  resources of many hearing
care providers,  combine to provide an opportunity to build an expanding network
of  Company-owned  and  licensed  hearing  care  centers  devoted  to  providing
high-quality hearing health care services.

ACQUISITIONS.  The Company works to expand its network of Company-owned  centers
in each new market by initially  targeting for acquisition a significant hearing
care  practice  in order  to  secure a solid  foundation  upon  which to build a
regional  network of  audiology  practices.  The  Company  then seeks to acquire
additional  individual or group practices in order to realize economies of scale
in management, marketing, and administration.  Due to the contacts of management
with  audiologists  in the industry,  the Company is frequently  presented  with
opportunities to acquire hearing care centers. From August 1, 1996, to September
30, 2000, the Company acquired 122 centers, all located in the United States.

         The Company looks at the following  factors before acquiring centers in
a particular  geographic  market:  (a)  population  size and  distribution;  (b)
audiology  practice  density,  saturation  and  average  group  size;  (c) local
competitors;  (d) level of managed care penetration;  and (e) local industry and
economy. In acquiring particular centers within a geographic market, the Company
seeks centers with the following  characteristics:  (a) an  established  patient
base drawing from a substantial metropolitan population; (b) significant revenue
and  profitability  prior to  acquisition;  and (c)  above-average  potential to
enhance center profitability after acquisition.

         Prior to acquiring a hearing care  center,  the Company  conducts a due
diligence  investigation of the center's  operations that includes an analytical
review of the center's financial  statements,  tax returns,  and other operating
data, a review of patient  files on a random  sample  basis,  a review of credit
reports,  contracts, bank deposits, and other documents and information that the
Company deems significant,  and the preparation of financial projections.  Based
on the information  collected and analyzed during the due diligence review,  the
Company determines an appropriate purchase price for the acquisition.

         The Company generally uses cash, promissory notes,  assumption of debt,
or a combination of the foregoing to fund acquisitions. The amount paid for each
practice  varies on a  case-by-case  basis  according  to  historical  revenues,
projected   earnings  after  integration  into  the  Company,   and  transaction
structure.   In  connection  with  each   acquisition,   the  Company   acquires
substantially  all of the assets of the  practice,  including  its  audiological
equipment and supplies, office lease and improvements, and patient files. At the
time a practice is acquired,  the audiologists and hearing instrument dispensers
associated with the practice typically become employees of the Company.

         There can be no assurance  that the Company will be able to continue to
complete  acquisitions  consistent  with its expansion  plans,  that such future
acquisitions will be on terms favorable to the Company, or that the Company will
be able to successfully integrate the hearing care centers that it acquires into
its business.  Successful  integration is dependent upon  maintaining  payor and
customer  relationships and converting the management information systems of the
centers the Company  acquires to the Company's  systems.  Significant  expansion
could place excessive strain on the Company's managerial and other resources and
could  necessitate  the  hiring  of  additional  managerial  and  administrative
personnel.  Unforeseen  problems with future  acquisitions  or failure to manage
expansion  effectively  may have a  material  adverse  effect  on the  business,
financial condition, and results of operations of the Company.

THE  SONUS  NETWORK.  The  Sonus  Network  was  established  in  August  1998 to
complement  the Company's  internal  growth and  acquisition  strategy and allow
additional  national  growth  without  incurring  the  added  capital  costs and
management  resources necessary for Company-owned  centers.  There are currently
281 members of The Sonus Network representing 442 locations in 43 states and the
District of Columbia.  The Company  plans on adding 240 new  franchisees  in the
next fiscal year. Unlike many traditional  franchise systems, the Company allows
its  franchisees  maximum  flexibility  in the  day-to-day  operation  of  their
businesses, including the extent to which the


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franchisees  wish to adopt the Sonus name and trademarks.  The Company  believes
that the primary  benefits of joining the Sonus  Network are reduced  pricing on
hearing instruments and related products,  access to quality marketing materials
and national advertising programs developed by Sonus, the ability to offer Sonus
private-label  products,  and exclusive  protected  territories for franchisees.
Additional benefits include  recruiting,  training,  and operational  consulting
services and on-line ordering of hearing instruments and related products.

OPERATING STRATEGY

         The Company's  operating  strategy is to provide its patients with high
quality and cost effective  hearing care products and services while at the same
time  increasing  its operating  margins by attracting  and retaining  patients,
recruiting qualified and productive  audiologists,  achieving economies of scale
and  administrative  efficiencies,  and  pursuing  large group and managed  care
contracts.

ATTRACTING AND RETAINING PATIENTS. The Company seeks to attract new patients and
retain  existing  patients at each center by providing  patients with  friendly,
comprehensive,   and  cost-effective   hearing  care  at  convenient  times  and
locations. In addition, by educating patients about hearing health issues and by
providing quality service during office visits and consistent  patient follow-up
and  support,  the Company  hopes to foster  patient  loyalty and  increase  the
likelihood of obtaining referrals and repeat visits for examinations and product
purchases.

RECRUITING QUALIFIED AND PRODUCTIVE  AUDIOLOGISTS.  Audiologists employed by the
Company  are  primarily  responsible  for  center  profitability  as well as for
attracting and retaining customers. The Company seeks to employ audiologists who
share the Company's goal of delivering high-quality hearing care service and who
are also dedicated to expanding and enhancing their  practices.  The Company has
developed an intensive six-week training course called the Greenhouse Program(R)
for its  audiologists  that  focuses  on  clinical  audiology  skills as well as
private practice business management.  Greenhouse participants are instructed by
some  of  the  hearing  health  industry's  most  accomplished  and  experienced
professionals.   The  Company  believes  that  the  Greenhouse   Program(R)  can
significantly  increase  employee  performance  and  improve  customer  service.
Greenhouse  Program(R)  graduates  consistently  rank  among the  Company's  top
performers.  The Company also believes that it can offer significant benefits to
private practice  audiologists by providing  assistance in administrative  tasks
associated with operating an audiology practice,  thereby allowing them to focus
on serving patients and increasing productivity.

ACHIEVING  ECONOMIES OF SCALE AND ADMINISTRATIVE  EFFICIENCIES.  A key operating
strategy  of  the  Company  is to  achieve  increased  economies  of  scale  and
administrative efficiencies at each of its centers. When a center is acquired by
the Company, it immediately has available to it terms and discounts with hearing
instrument  manufacturers  that  are  generally  more  favorable  than it  could
negotiate independently.  In addition, the Company believes that by centralizing
certain  management and  administrative  functions  such as marketing,  billing,
collections,  human resources, risk management,  payroll, and general accounting
services, the profitability of a center can be improved by spreading the cost of
such  functions over a larger revenue base. The Company has developed an on-line
management  information  system that links the Company's  centers located in the
United  States with the  Company's  corporate  headquarters  in order to provide
management with the ability to collect and analyze center data, control overhead
expenses,  allow detailed  budgeting at the center level,  and permit  effective
resource management.

PURSUE LARGE GROUP AND MANAGED CARE CONTRACTS. Although the Company intends to
continue to aggressively pursue  private-payor  business because it is presently
more pervasive and profitable than managed care business,  the Company  believes
that by  providing  comprehensive  geographic  coverage in a  particular  market
through its Company-owned and franchised centers and the over 1,400 audiologists
affiliated  with its Hear PO subsidiary,  it is well positioned to offer hearing
care services to managed care group and corporate  health care  organizations in
that market. Managed care arrangements typically shift some of the economic risk
of providing  patient care from the person who pays for the care to the provider
of the care by capping  fees,  requiring  reduced  fees, or paying a set fee per
patient  irrespective of the amount of care  delivered.  With respect to hearing
care, such limits could result in reduced  payments for services or restrictions
on the types of services for which  reimbursement  is available or the frequency
of  replacements  or upgrades of equipment.  At the present  time,  managed care
penetration  of the hearing  care market is limited.  However,  if managed  care
begins to play a larger  role in  hearing  care,  the  Company  plans to develop
information  systems  to  improve  productivity,  manage  complex  reimbursement
methodologies,  measure patient satisfaction and outcomes of care, and integrate
information from multiple sources.

         Many third-party insurers impose restrictions in their health insurance
policies on the  frequency  with which  hearing  instruments  may be upgraded or
replaced on a reimbursable  basis.  Such  restrictions have a negative impact on
hearing  instrument  sales volume.  There can be no guarantee that such insurers
will not implement  other policy  restrictions in the future in order to further
minimize reimbursement for hearing care. Such restrictions could have a material
adverse effect on the Company's business,  financial  condition,  and results of
operations.


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CENTER STAFFING AND FACILITIES

         Typically,  each Company-owned  hearing center is staffed with at least
one audiologist  and one patient care  coordinator,  who handles  scheduling and
clerical  functions.  Where volume  warrants,  a center may also be staffed with
additional  audiologists,   hearing  instrument  dispensers,  and  patient  care
coordinators.  An  audiologist  employed  by the  Company has a masters or Ph.D.
degree in audiology.  The  audiologist is licensed by the  appropriate  state or
province  to  dispense  hearing  instruments  and is a  member  of the  American
Speech-Language   Hearing   Association   or   the   Canadian   Association   of
Speech/Language Pathologists and Audiologists.

         Each of the  Company's  hearing  centers  operates in leased space that
ranges in size from 800 to 3,000 square feet depending on patient volume and the
extent of services  provided by the center.  Centers  generally have a reception
seating area, a reception work and filing area, an office for the audiologist or
hearing  instrument  dispenser,  a laboratory for hearing instrument repairs and
modifications,  a  technology  demonstration  room  and an  evaluation  room.  A
properly equipped office offering only hearing rehabilitation  services requires
equipment  that costs  $50,000 to $75,000.  The cost of  equipment  for a center
offering  advanced  audio-diagnostic  services  is much  greater and ranges from
$225,000 to $250,000.

PRODUCTS AND SUPPLIERS

         The hearing  instrument  manufacturing  industry is highly  competitive
with   approximately  40  manufacturers   serving  the  worldwide  market.   Few
manufacturers offer significant product  differentiation.  The Company currently
purchases  a large  percentage  of its  hearing  instruments  from  six  primary
manufacturers based upon criteria that include quality,  price, and service. The
Company  uses four top  hearing  instrument  manufacturers  to produce its Sonus
Solution(TM)  line  of  private-label   digital  hearing  instruments.   Hearing
instruments in the Sonus  Solution(TM) line come with a three-year  warranty,  a
three-year  supply  of  batteries,   and  a  75-day  return  policy.  The  Sonus
Solution(TM) line is available only at Company-owned  and franchised  locations.
In addition to hearing  instruments,  the Company's centers also offer a limited
selection  of  other  assistive   listening   devices  and  hearing   instrument
accessories.

MARKETING

         The  Company's  marketing  program is designed to help its hearing care
centers retain existing  patients and expand the services they receive,  attract
new patients, and develop contracts to serve large groups of patients.

         The Company believes that patient  satisfaction is the key to retaining
and  expanding  services to existing  patients.  The Company also  believes that
delivering  comfortable,  high quality  hearing care at times and locations that
are convenient for the patient will motivate patients to return to the Company's
centers for their future  hearing care needs.  Educating  patients about hearing
health,  prescribing only necessary  hearing enhancing  products,  ensuring that
each  patient  leaves  a center  with a  future  visit  already  scheduled,  and
maintaining  consistent  patient  follow-up  and support are key elements of the
Company's plan to build patient loyalty and patronage.

         After a patient has obtained a hearing instrument, ongoing revenues are
generated from battery purchases and routine maintenance of the instruments. The
Company  believes that repeat  revenues are  attributable  to the length of time
that a  center  has  been  established  and  the  effectiveness  of its  patient
retention programs.

         The Company  believes that the same aspects of the  Company's  approach
that earn the loyalty of current  patients will also generate new patients.  The
Company's  new  patient  marketing  programs  are  designed  to help the Company
generate  referrals  from  physicians  and  existing  patients  and increase the
Company's  visibility  in the  community.  The  Company  seeks  to  foster  such
visibility  by  developing  marketing  materials  and  information  sources that
communicate the Company's  philosophy of high quality  patient-oriented  hearing
care.  In July 2000,  the Company  launched  its  first-ever  national  consumer
advertising campaign. The Company estimates that the campaign, which is expected
to continue  throughout the current fiscal year,  will reach  approximately  120
million people each quarter.  Advertisements will appear in publications such as
READER'S  DIGEST  (MATURE  SELECT),  READER'S  DIGEST  LARGE  EDITION FOR EASIER
READING,  NEW  CHOICES,  PARADE  MAGAZINE,  RX REMEDY,  SATURDAY  EVENING  POST,
ROTARIAN, KIWANIS, and THE LION.

         The Company's large group marketing  approach is designed to enable the
Company to develop contacts with self-insured employers and with health plans in
the  metropolitan  areas it serves and  emphasizes the  convenience,  quality of
care, and wide range of services offered by the Company.  The economies of scale
available to the Company may also allow health plans and self-insured  employers
served by the  Company to reduce  administrative  burdens  they might  otherwise
face. The Company  believes that it is well  positioned to respond to challenges
presented by the growth of managed care arrangements as they arise.

                                       7
<PAGE>

COMPETITION

         The hearing  care  industry  in the United  States and Canada is highly
fragmented  and intensely  competitive.  Many of the Company's  competitors  are
small  retailers  that  focus  primarily  on the  sale of  hearing  instruments.
However,  the Company also competes on a regional  basis with other  networks of
hearing care centers such as Hearx Ltd., Helix Hearing Care of America,  Newport
Audiology  Centers,  and American Hearing  Centers,  as well as with Beltone and
Miracle-Ear,  two large  manufacturers  of hearing  instruments  that distribute
directly to consumers through national networks of franchised  centers.  Beltone
and  Miracle-Ear  place a heavy  emphasis on advertising  and enjoy  significant
consumer brand name  recognition.  There can be no assurance that one or more of
these  competitors  will not seek to compete directly in the markets targeted by
the Company,  nor can there be any assurance that the largely fragmented hearing
care market cannot be  successfully  consolidated  by other companies or through
the establishment of co-operatives, alliances, confederations or the like.

         The Sonus Network  franchise  program  competes for members with buying
groups such as The Audiology Co-Op and American Hearing Aid Associates that have
been formed to provide small hearing instrument  retailers with shared economies
of scale.  The Sonus  Network also  competes for members to a lesser extent with
mature franchise systems such as Beltone and Miracle-Ear.

REGULATION

         The sale of hearing  instrument  devices is  regulated  at the  federal
level in the United  States by the United  States  Food and Drug  Administration
("FDA"),  which has been  granted  broad  authority to regulate the hearing care
industry. Under federal law, hearing instruments may only be sold to individuals
who have first obtained a medical evaluation from a licensed physician, although
a fully  informed  adult may waive a medical  evaluation  in certain  instances.
Regulations  promulgated  by the FDA also presently  require that  dispensers of
hearing  instruments  provide  customers  with certain  warning  statements  and
notices in connection  with the sale of hearing  instruments and that such sales
be made in compliance with certain labeling requirements.

         Most  states in the United  States and many  provinces  in Canada  have
established  formal  licensing  procedures  that  require the  certification  of
audiologists   and/or  HISs.   Although  the  extent  of  regulation  varies  by
jurisdiction, almost all states and provinces engage in some degree of oversight
of the  industry.  The Company  operates its hearing  care  centers  through its
wholly owned  subsidiaries,  Sonus-USA,  Sonus-Texas,  and  Sonus-Canada.  These
subsidiary  corporations  employ  licensed  audiologists  and HISs who offer and
perform  audiology  services and dispense  hearing  instruments on behalf of the
Company.

         In certain states in the United States,  business  corporations such as
Sonus-USA  may not be  authorized  to employ  audiologists  and offer  audiology
services.  For example,  in California,  where the Company  operates a number of
centers,   although  the  performance  of  audiology  services  by  professional
corporations owned solely by licensed audiologists is expressly authorized under
California  law, it is unclear  whether general  business  corporations  such as
Sonus-USA  may  employ  licensed  audiologists  to perform  audiology  services.
However,  the  California  Department  of  Consumer  Affairs  has  indicated  by
memorandum that speech-language pathologists, which are regulated under statutes
and  regulations  similar to those  governing  audiologists,  may  practice in a
general business corporation and that a general business corporation may provide
speech-language  pathology  services  through licensed speech  pathologists.  In
Illinois,  where the  Company  also  operates  a number of  centers,  it is also
unclear whether general business  corporations may employ licensed  audiologists
to  perform   audiology   services.   Under  Illinois  law,  only   professional
corporations  and  individuals  are  authorized  to obtain  licenses to practice
audiology.

         The laws and  regulations  governing  the  practice  of  audiology  are
enforced by regulatory agencies with broad discretion. If the Company were found
to be in  violation  of such laws and  regulations  in one or more  states,  the
consequences  could  include  the  imposition  of fines and  penalties  upon the
Company and its  audiologists as well as the issuance of orders  prohibiting the
Company from operating its centers under its present  structure.  In that event,
among the solutions the Company might consider would be the restructuring of all
or a portion  of its  operations  in a manner  similar  to that used by  certain
medical  and  dental  center  networks.  Under  such a  structure,  professional
corporations  owned by licensed  audiologists would contract with the Company to
perform   professional   services  and  the  Company  would  contract  with  the
professional corporations to provide management services.

         No assurance can be given that the Company's  activities  will be found
to be in compliance with laws and regulations  governing the corporate  practice
of audiology or, if its activities are not in compliance,  that the  operational
structure of the Company can be modified to permit compliance.  In addition,  no
assurance  can be given  that other  states or  provinces  in which the  Company
presently  operates will not enact  prohibitions  on the  corporate  practice of
audiology or that the  regulatory  framework of certain  jurisdictions  will not
limit the  ability  of the  Company  to expand  into such  jurisdictions  if the
Company  is unable to  modify  its  operational  structure  to comply  with such
prohibitions or to conform with such regulatory  framework.  Additional laws and
regulations  may be adopted in the future at the  federal,  state,  or  province
level  that  could have a material  adverse  effect on the  business,  financial
condition, and results of operations of the Company.

                                       8
<PAGE>

         A portion of the revenues of the hearing  care centers  operated by the
Company  comes from  Medicare and Medicaid  programs.  Federal law prohibits the
offer,  payment,  solicitation  or receipt of any form of remuneration in return
for, or in order to induce,  (i) the referral of a Medicare or Medicaid patient,
(ii) the  furnishing  or  arranging  for the  furnishing  of  items or  services
reimbursable under Medicare or Medicaid programs or (iii) the purchase, lease or
order  of  any  item  or  service   reimbursable  under  Medicare  or  Medicaid.
Noncompliance with the federal anti-kickback legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties.

         Because of its franchise  licensing  program,  The Sonus  Network,  the
Company is subject to state and federal regulation of franchising.  Much of this
regulation  involves providing detailed  disclosure to a prospective  franchisee
and periodic registration by the franchisor with state administrative  agencies.
Additionally, some states have enacted, and others have considered,  legislation
that governs the  termination or non-renewal of a franchise  agreement and other
aspects of the  franchise  relationship.  The United  States  Congress  has also
considered legislation of this nature. The Company believes that it has complied
with all applicable franchise laws and regulations.

PRODUCT AND PROFESSIONAL LIABILITY; PRODUCT RETURNS

         In the ordinary  course of its business,  the Company may be subject to
product and  professional  liability  claims alleging the failure of, or adverse
effects  claimed to have been caused by,  products sold or services  provided by
the Company. The Company maintains insurance against such claims at a level that
the Company believes is adequate.  A customer may return a hearing instrument to
the Company and obtain a full refund up to 60 days (75 days for certain  models)
after  the  date of  purchase.  In  general,  the  Company  can  return  hearing
instruments  returned  by  customers  within  the return  period  allowed by the
Company to the manufacturer for a full refund.

EMPLOYEES

         At October 1, 2000,  the Company  had 290  full-time  and 96  part-time
employees,  of which  104 are  audiologists  or  hearing  instrument  dispensers
practicing  full time and 42 are  practicing  part-time.  None of the  Company's
employees are  represented  by a labor union.  Management  believes it maintains
good relationships with its employees.

SERVICE AND ENFORCEMENT OF LEGAL PROCESS

         The Company is incorporated under the laws of Yukon Territory,  Canada.
One of the  Company's  directors is a resident of Canada and all or a portion of
the assets of such director and of the Company are located outside of the United
States. As a result, it may be difficult for holders of the Company's securities
to effect service within the United States upon a director who is not a resident
of the United  States,  or to realize in the United  States  upon  judgments  of
courts of the United States  predicated upon the civil  liability  provisions of
the United States federal  securities  laws to the extent such judgments  exceed
such person's United States assets.  There is doubt as to the  enforceability in
Canada against the Company or against any of its directors who are not residents
of the United  States,  in  original  actions or in actions for  enforcement  of
judgments of United States courts, of liabilities  predicated solely upon United
States federal  securities  laws. The Company's  agent for service of process in
the United States is MN Service Corp.  (Oregon),  111 S.W.  Fifth Avenue,  Suite
3500, Portland, Oregon 97204, telephone (503) 224-5858.

ITEM 2. DESCRIPTION OF PROPERTY

         The Company's  executive  offices are located in  approximately  12,400
square feet of leased  office  space in  downtown  Portland,  Oregon.  The lease
expires on  September  30, 2004 and provides for an annual base rent of $235,200
until October 1, 2003, when the annual base rent increases to $273,060.  Each of
the Company's  hearing centers operates in leased space that ranges in size from
800 to 3,000 square feet.  Approximately  65 percent of the locations are leased
for one to eight-year  terms pursuant to generally  non-cancelable  leases (with
renewal options in some cases) with the remaining locations leased on a month-to
month basis. The aggregate committed rental expense as of July 31, 2000, for the
subsequent five-year period is approximately $5.8 million.

ITEM 3. LEGAL PROCEEDINGS

         None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.

                                       9
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON SHARES

         The  Company's  common  shares  ("Common  Shares")  are  traded  on the
American Stock  Exchange.  The following  table sets forth the reported high and
low sales prices in United States  dollars for the Common Shares for the periods
indicated:

         FISCAL YEAR                     PERIOD               HIGH        LOW
         -----------                     ------               ----        ---
         1999........................ First Quarter          $9.875     $4.500
                                      Second Quarter         $5.375     $3.188
                                      Third Quarter          $5.750     $4.125
                                      Fourth Quarter         $4.938     $4.000

         2000........................ First Quarter          $4.500     $3.125
                                      Second Quarter         $5.000     $2.750
                                      Third Quarter          $5.500     $3.438
                                      Fourth Quarter         $3.625     $2.750

HOLDERS AND DIVIDENDS

         As of  October  1,  2000,  there  were 57  holders  of record of Common
Shares.

         For as long as Warburg,  Pincus Ventures,  L.P.,  beneficially  owns at
least  666,666  Series A  Convertible  Preferred  Shares or Series B Convertible
Preferred  Shares or the Common  Shares  into which  such  preferred  shares are
convertible,  the  Company  may not,  without  such  holder's  consent,  pay any
dividend or distribution on its Common Shares.

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

         Following is a summary of the  principal  Canadian  federal  income tax
considerations  under  the  Income  Tax Act  (Canada)  (the  "Tax  Act") and the
regulations  thereunder  generally  applicable to a holder of Common Shares who,
for purposes of the Tax Act, holds such shares as capital  property and deals at
arm's length with the Company. Generally, Common Shares will be considered to be
capital property to a holder provided the holder does not hold the Common Shares
in the course of carrying on a business of trading or dealing in securities  and
has not acquired them in one or more transactions  considered to be an adventure
in the nature of trade. Special rules apply to non-resident  insurers that carry
on an insurance business in Canada and elsewhere.

         This summary is based upon the provisions of the Tax Act in force as of
the date  hereof,  all  specific  proposals  to amend the Tax Act that have been
publicly announced prior to the date hereof (the "Proposed  Amendments") and the
Company's  understanding of the current published  administrative  and assessing
policies  and  practices  of the Canada  Customs  and  Revenue  Agency.  For the
purposes of this  summary,  it has been assumed that the Tax Act will be amended
as proposed,  although no assurance can be given in this regard. This summary is
not exhaustive of all possible federal income tax  consequences  and, except for
the Proposed Amendments,  does not anticipate any changes in the law, whether by
legislative,  governmental or judicial decision or action, nor does it take into
account provincial, territorial or foreign tax considerations,  which may differ
significantly  from those  discussed  herein.  This summary is not applicable to
holders who are "specified financial  institutions" for purposes of the Tax Act,
a  holder  that  is a  "financial  institution"  as  defined  in the Tax Act for
purposes  of the  mark-to-market  rules,  or to a holder if an  interest in such
holder would be a "tax shelter investment" as defined in the Tax Act.

         This summary is of a general nature only and is not intended to be, and
should not be  construed to be,  legal or tax advice to any  particular  holder.
Accordingly,  holders should consult their  independent  tax advisers for advice
with  respect  to the  income  tax  consequences  relevant  to their  particular
circumstances.

         The following  applies to holders of Common Shares who are not resident
in  Canada  for  purposes  of the Tax Act and who do not use or hold and are not
deemed to use or hold their Common Shares in, or in the course of, carrying on a
business in Canada.

                                       10
<PAGE>

DISPOSITIONS OF COMMON SHARES. A non-resident holder will, upon a disposition or
deemed disposition of Common Shares, not be subject to taxation in Canada on any
gain  realized  on the  disposition  unless  the shares  are  "taxable  Canadian
property"  for the  purposes of the Tax Act and no relief is  afforded  under an
applicable  tax  convention  between  Canada and the country of residence of the
holder.  Since the Common Shares are listed on a prescribed  stock  exchange for
the purposes of the Tax Act,  Common Shares held by a  non-resident  holder will
generally  not be "taxable  Canadian  property"  unless,  at any time during the
five-year period immediately preceding the disposition, the non-resident holder,
persons with whom the non-resident  holder did not deal at arm's length,  or the
non-resident  holder  together  with  such  persons,  owned or had the  right to
acquire  25% or more of the  issued  shares of any class of the  capital  of the
Company.  Any  interest  in shares  or  options  in  respect  of shares  will be
considered to be the  equivalent of ownership of such shares for purposes of the
definition of taxable Canadian property.

         Non-residents  whose shares constitute "taxable Canadian property" will
be subject to  taxation in respect of a  disposition  or deemed  disposition  of
Common Shares on the same basis as Canadian  residents unless otherwise exempted
by an applicable tax  convention  between Canada and the country of residence of
the holder.

         Pursuant to the Canada-United  States Income Tax Convention,  1980 (the
"Convention"),  shareholders  of the Company  that are  residents  in the United
States for the purposes of the  Convention  and whose shares might  otherwise be
"taxable  Canadian  property" may be exempt from Canadian taxation in respect of
any gains on the disposition of the Common Shares,  provided the principal value
of the Company is not derived from real  property  located in Canada at the time
of disposition.

         Non-resident  holders  who might hold their  Common  Shares as "taxable
Canadian  property"  should  consult  their own tax advisers with respect to the
income tax consequences of a disposition of their Common Shares.

         Non-resident  holders  whose  shares are  repurchased  by the  Company,
except in respect of certain  purchases  made by the Company in the open market,
will be deemed to have  received  the payment of a dividend by the Company in an
amount equal to the excess paid over the paid-up capital of the Common Shares so
purchased.  Such deemed dividend will be excluded from the holder's  proceeds of
disposition  of the Common Shares for the purposes of computing any capital gain
or loss but will be  subject to  Canadian  non-resident  withholding  tax in the
manner described below under "Dividends."

DIVIDENDS.  Dividends received by a non-resident holder of Common Shares will be
subject to  Canadian  withholding  tax at the rate of 25% of the amount  thereof
unless the rate is reduced under the  provisions of an applicable tax convention
between Canada and the country of residence of the holder. The provisions of the
Convention generally reduce the rate to 15%. A further reduction to 5% under the
Convention  will be available if the  recipient is a company which owns at least
10% of the voting shares of the Company.

INVESTMENT CANADA ACT

         The  Investment  Canada Act (the "ICA")  prohibits the  acquisition  of
control of a Canadian  business by non-Canadians  without review and approval of
the Investment  Review Division of Industry Canada,  the agency that administers
the ICA,  unless such  acquisition is exempt from review under the provisions of
the ICA. The Investment  Review  Division of Industry Canada must be notified of
such exempt  acquisitions.  The ICA covers  acquisitions of control of corporate
enterprises,  whether by purchase of assets,  shares or "voting interests" of an
entity that  controls,  directly or  indirectly,  another  entity  carrying on a
Canadian business.

         Apart  from the ICA,  there  are no other  limitations  on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Company's  Articles.  There are no other decrees or regulations in Canada
that  restrict  the  export or import of  capital,  including  foreign  exchange
controls, or that affect the remittance of dividends, interest or other payments
to  nonresident  holders of the  Company's  Common  Shares,  except as discussed
elsewhere herein.

SALES OF UNREGISTERED SECURITIES DURING FISCAL 2000

         There were no securities  of the Company  issued  without  registration
under the  Securities  Act of 1933 during the fiscal  year ended July 31,  2000,
except as previously  reported in the Company's quarterly reports on Form 10-QSB
filed during the fiscal year.

                                       11
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW

         During  the  fiscal  year ended July 31,  2000,  the  Company  achieved
improved  financial  results  compared to the prior fiscal year.  For the fiscal
year ended July 31, 2000, the Company generated total revenues of $44.0 million,
an increase of 30% over fiscal  1999.  For the fiscal year ended July 31,  2000,
the Company incurred a net loss of $3.1 million, a decrease of $1.8 million from
the  fiscal  1999  loss of $4.9  million.  As of July 31,  2000,  the  Company's
accumulated  deficit  was $14.7 million and its total  shareholders'  equity was
$25.5 million.

ACQUISITIONS

         During the fiscal year ended July 31,  2000,  the  Company  acquired 16
hearing care centers in 10 transactions. The Company also closed or consolidated
10 centers  during the fiscal  year in order to more  effectively  allocate  its
resources.  The aggregate purchase price for the acquisitions  consisted of cash
payments  of  $438,000,  promissory  notes  issued by the  Company  of  $521,000
generally  payable over three years,  and $85,000 in assumed  liabilities.  As a
result  of the  acquisitions,  the  Company  recorded  approximately  $6,000  in
inventory,  $157,000 in property and  equipment,  $10,000 in other  assets,  and
$795,000 in goodwill, which included costs related to acquisitions,  and $85,000
for covenants not to compete.

         The 16 hearing  care  businesses  acquired  by the  Company  during the
fiscal year ended July 31, 2000,  have  combined  historical  revenues for their
immediately  preceding fiscal years of approximately  $3.9 million.  The Company
expects these centers to contribute to the Company's future revenues  consistent
with their  historical  revenues,  as well as to have a positive  effect on cash
flows and liquidity.

         As of July 31, 2000,  the Company had recorded  $20,970,000 in goodwill
and  $2,311,000 in covenants not to compete.  The  unamortized  balance  totaled
$19,678,000  at  July  31,  2000,  which  represented  approximately  52% of the
Company's total assets.

RESULTS OF OPERATIONS

YEAR ENDED JULY 31, 2000, COMPARED TO YEAR ENDED JULY 31, 1999

         REVENUES.  Net revenues  for the fiscal year ended July 31, 2000,  were
$43,959,000,  representing a 30% increase over net revenues of  $33,759,000  for
the prior fiscal year.  The increase was due to the 16 centers  acquired  during
fiscal  2000,  as well as an increase of 5% in  same-store  revenue  compared to
1999.  Product sales revenues were  $37,252,000 for the 2000 fiscal year, up 28%
from the $29,044,000 for fiscal 1999. Audiological service revenues increased 6%
from  $3,392,000  in fiscal 1999 to $3,589,000  for the 2000 fiscal year.  Other
revenues  increased 136% to $3,118,000 in fiscal 2000 from  $1,323,000 in fiscal
1999 due to the rapid growth of the Company's  franchise  license  program,  The
Sonus  Network,  and  increased  revenues  from  the  Company's  Hear  PO  Corp.
subsidiary.

         GROSS PROFIT ON PRODUCT SALES. Product gross profit for the fiscal year
ended July 31,  2000,  was  $24,365,000  compared to  $18,278,000  for the prior
fiscal  year.  Gross profit  percentage  on product  sales  increased to 65% for
fiscal  2000 from 63% for fiscal  1999.  The  increase in product  gross  profit
percentage  was  due to  more  favorable  contracts  with  suppliers,  increased
utilization of the Company's private-label hearing instruments, and better price
management.

         CLINICAL EXPENSES.  As a percentage of net revenues,  clinical expenses
decreased  to 45% for the fiscal year ended July 31,  2000,  compared to 53% for
the fiscal year ended July 31,  1999.  The  percentage  decrease  was due to the
Company's  ability  to cut  costs,  streamline  its  operations,  and  eliminate
inefficient and  duplicative  processes.  Clinical  expenses for the fiscal year
ended July 31,  2000,  were  $19,885,000,  representing  an increase of 12% over
clinical  expenses of $17,795,000  for the prior fiscal year.  This increase was
primarily due to clinical  expenses  associated  with the 16 additional  centers
that were  acquired by the Company  during the fiscal year ended July 31,  2000.
Clinical  expenses  include  all  personnel,   marketing,  occupancy  and  other
operating expenses at the center level.

         PROVISION  FOR AGED  RECEIVABLES.  During the fourth  quarter of fiscal
2000,  the Company  incurred a charge of  $2,300,000  to increase  its  reserves
related to aged accounts  receivable.  The Company established the reserve based
on the aging of the accounts receivable,  especially those receivables in excess
of  one  year,  because  management   believes  that  full  collection  of  such
receivables is doubtful.

         GENERAL AND ADMINISTRATIVE  EXPENSES.  As a percentage of net revenues,
general and  administrative  expenses decreased to 20% for the fiscal year ended
July 31,  2000,  versus 22% for the same period in the prior  fiscal  year.  The
decrease in general and administrative  expenses as a percentage of revenues was
due to  growth  in the  Company's  revenue  base as a  result  of its  strategic
acquisition program and enhanced marketing efforts, as well as continued efforts
to cut administrative costs. General and administrative expenses in dollar terms
increased  16% from  $7,583,000  for the fiscal  year ended  July 31,  1999,  to
$8,778,000  for the fiscal year ended July 31,  2000.  The  increase  was due to
increased  personnel costs and other corporate  expenses related to building the
appropriate infrastructure to support the growth of the Company.

         DEPRECIATION  AND AMORTIZATION  EXPENSE.  Depreciation and amortization
expense for the fiscal year ended July 31, 2000, was


                                       12
<PAGE>

$3,109,000, an increase of 27% over the depreciation and amortization expense of
$2,450,000  for  the  prior  fiscal  year.   The  increase   resulted  from  the
depreciation  of  property  and  equipment  and  amortization  of  goodwill  and
covenants not to compete  associated with the 16 additional  centers acquired by
the Company during the fiscal year ended July 31, 2000.

         INTEREST INCOME AND EXPENSE.  Interest income for the fiscal year ended
July 31,  2000,  was  $260,000  compared to $261,000  for the prior fiscal year.
Interest expense for the fiscal year ended July 31, 2000, was $342,000  compared
to $300,000 for the fiscal year ended July 31, 1999,  an increase of 14%, due to
higher balances of long-term debt incurred in connection with  acquisitions  and
capital expenditures.

         NET LOSS.  For the fiscal year ended July 31, 2000,  the  Company's net
loss decreased to $3,101,000 compared to a net loss of $4,884,000 for the fiscal
year  ended  July 31,  1999.  The  Company  had income  from  operations  before
depreciation  and  amortization  for  fiscal  2000 of  $109,000  compared  to an
operating  loss  from  operations   before   depreciation  and  amortization  of
$2,385,000 for fiscal 1999, an improvement of $2,494,000.

YEAR ENDED JULY 31, 1999, COMPARED TO YEAR ENDED JULY 31, 1998

         REVENUES.  Net revenues  for the fiscal year ended July 31, 1999,  were
$33,759,000,  representing a 51% increase over revenues of  $22,368,000  for the
prior fiscal year.  The increase was  primarily  due to the 31 centers  acquired
during fiscal 1999. Net revenue was also favorably impacted by an increase of 5%
in  comparable  center  revenue in fiscal  1999.  Comparable  centers  are those
centers  that have been open at least 24 months.  Product  sales  revenues  were
$29,044,000  for the 1999 fiscal year,  up 55% from the  $18,792,000  for fiscal
1998.  Audiological service revenues increased from $3,311,000,  or 15% of total
revenues, in fiscal 1998, to $3,392,000,  or 10% of total revenues, for the 1999
fiscal year.

         GROSS PROFIT ON PRODUCT SALES. Product gross profit for the fiscal year
ended July 31,  1999,  was  $18,278,000  compared to  $11,080,000  for the prior
fiscal  year.  Gross profit  percentage  on product  sales  increased to 63% for
fiscal 1999 from 59% for fiscal 1998. The increase in gross profit percentage on
product sales was primarily  attributable to increased buying power with hearing
instrument  manufacturers,  less  dependence  on sales  discounts,  better price
management and a new tiered pricing strategy based on levels of technology.

         CLINICAL EXPENSES.  As a percentage of net revenues,  clinical expenses
decreased  to 53% for the fiscal year ended July 31,  1999,  compared to 55% for
the fiscal year ended July 31,  1998.  The  percentage  decrease  was due to the
Company's  ability  to cut  costs,  streamline  its  operations,  and  eliminate
inefficient and  duplicative  processes.  Clinical  expenses for the fiscal year
ended July 31,  1999,  were  $17,795,000,  representing  an increase of 45% over
clinical  expenses of $12,297,000  for the prior fiscal year.  This increase was
primarily due to clinical  expenses  associated  with the 31 additional  centers
that were  acquired by the Company  during the fiscal year ended July 31,  1999.
Clinical  expenses  include  all  personnel,   marketing,  occupancy  and  other
operating expenses at the center level.

         GENERAL AND ADMINISTRATIVE  EXPENSES.  As a percentage of net revenues,
general and  administrative  expenses decreased to 22% for the fiscal year ended
July 31,  1999,  versus 26% for the same period in the prior  fiscal  year.  The
decrease in general and administrative  expenses as a percentage of revenues was
due to  growth  in the  Company's  revenue  base as a  result  of its  strategic
acquisition program and enhanced marketing efforts, as well as an administrative
restructuring  and  cost-cutting  program  implemented  by the Company in fiscal
1999.  General and  administrative  expenses in dollar terms  increased 29% from
$5,896,000 for the fiscal year ended July 31, 1998, to $7,583,000 for the fiscal
year ended July 31, 1999, due to planned  increases in corporate staff and other
corporate expenses related to the operation of a larger organization.

         DEPRECIATION  AND AMORTIZATION  EXPENSE.  Depreciation and amortization
expense for the fiscal year ended July 31, 1999, was $2,450,000,  an increase of
80% over the depreciation  and amortization  expense of $1,361,000 for the prior
fiscal  year.  The  increase  resulted  from the  depreciation  of property  and
equipment and  amortization of goodwill and covenants not to compete  associated
with the 31 additional  centers  acquired by the Company  during the fiscal year
ended July 31, 1999, as well as from  depreciation and  amortization  associated
with businesses acquired in the second half of fiscal 1998.

         INTEREST INCOME AND EXPENSE.  Interest income for the fiscal year ended
July 31, 1999,  decreased to $261,000  from  $452,000 for the prior fiscal year.
The decrease was due to lower balances of cash and short-term  investments  held
by the Company.  Interest  expense for the fiscal year ended July 31, 1999,  was
$300,000  compared to $149,000 for the fiscal year ended July 31,  1998,  due to
higher balances of long-term debt incurred in connection with acquisitions.

         NET LOSS.  For the fiscal year ended July 31,  1999,  the Company had a
net loss of $4,884,000  compared to a net loss of $4,594,000 for the fiscal year
ended July 31, 1998. The Company's loss from operations before  depreciation and
amortization for fiscal 1999 was $2,385,000 compared to an operating loss before
depreciation and amortization of $3,537,000 for fiscal 1998.

                                       13
<PAGE>

LIQUIDITY AND CASH RESERVES

         For the fiscal  year ended July 31,  2000,  net cash used in  operating
activities was $2,051,000  compared to $2,281,000 for fiscal 1999. Net cash used
in operating  activities  for fiscal 2000 resulted  primarily from the Company's
earnings  before  depreciation  and  amortization  of $8,000  and  increases  in
accounts receivable, other receivables, and inventory of $4,971,000, $1,141,000,
and  $447,000,  respectively,  offset by an  increase  in  accounts  payable and
accrued  liabilities  of  $1,839,000  and the  Company's  provision for bad debt
expense  and  provision  for  aged  receivables   of  $391,000  and  $2,300,000,
respectively.  Net  cash  used in  operating  activities  for  fiscal  1999  was
primarily   attributable   to  the  Company's  loss  before   depreciation   and
amortization of $2,434,000,  an increase in accounts receivable of $554,000, and
a decrease in accounts  payable and accrued  liabilities of $558,000,  offset by
decreases  in  other   receivables  and  inventory  of  $172,000  and  $560,000,
respectively,  the provision for bad debt expense of $389,000,  and compensation
cost recognized for options granted to non-employees of $203,000.

         Net cash used in investing  activities  was $3,706,000 for fiscal 2000,
consisting primarily of the purchase of property and equipment of $3,305,000 and
net cash paid for business  acquisitions of $438,000.  In fiscal 1999, investing
activities  provided net cash of $878,000 as a result of the sale of short -term
investments  of  $6,408,000,  which was offset by the  purchase of property  and
equipment of $3,368,000,  additional  costs related to acquisitions of $188,000,
and net cash paid on business acquisitions of $2,062,000.

         Financing  activities  provided net cash of  $6,038,000 in fiscal 2000,
primarily as a result of the issuance of preferred stock in October 1999 for net
proceeds of $9,860,000, offset by repayments of long-term debt and capital lease
obligations  of $3,236,000  and  repayments of bank loans and  short-term  notes
payable of $500,000.  Financing  activities  used net cash of $821,000 in fiscal
1999,  as the  result of the  repayment  of  long-term  debt and  capital  lease
obligations of $1,626,000,  offset by borrowings under bank loans and short-term
notes  payable of $454,000,  advances  from  shareholders  of $190,000,  and the
issuance of common stock that provided proceeds of $248,000.

         In July 2000,  the  Company,  through its  subsidiaries  Sonus-USA  and
Sonus-Texas, entered into a revolving line of credit agreement with a commercial
bank.  The line of credit,  which is primarily  secured by accounts  receivable,
matures on June 30, 2001, and bears interest at the bank's prime rate plus 1/2%.
The amount  available for borrowing  under the line of credit was  $2,000,000 at
July 31, 2000, and there was no amount outstanding at that date.

         The  Company  believes  that  its  cash  and  short-term   investments,
revolving line of credit,  and cash generated from operations will be sufficient
to meet its anticipated cash needs for working capital and capital  expenditures
for at least the next twelve months.  However, the Company's ability to generate
net cash from operations will depend heavily on its ability to collect  existing
accounts  receivable in a timely manner. The Company may seek additional funding
to support the Company's strategy of acquiring  additional hearing care centers.
These funding  requirements  may result in the Company  incurring  long-term and
short-term  indebtedness  and in the  public or private  issuance,  from time to
time, of additional  equity or debt securities.  Any such issuance of equity may
be dilutive to current  shareholders  and debt financing may impose  significant
restrictive  covenants on the Company.  There can be no assurance  that any such
financing  will be  available  to the  Company  or will be  available  on  terms
acceptable to the Company.

ACCOUNTING PRONOUNCEMENTS

         In June 1998,  Statement of  Financial  Accounting  Standards  No. 133,
"Accounting for Derivative  Instruments and Hedging Activities" ("SFAS No. 133")
was issued. SFAS No. 133 standardizes the accounting for derivative  instruments
by requiring  that an entity  recognize  those items as assets or liabilities in
the financial statements and measure them at fair value. In addition,  Statement
of Financial  Accounting  Standard No. 138,  "Accounting for Certain  Derivative
Instruments and Certain Hedging  Activities" ("SFAS No. 138") was issued in June
2000. SFAS No. 138 amends the accounting and reporting standards of SFAS No. 133
for certain derivative  instruments and certain hedging activities.  Because the
Company  does  not  currently  hold  any  derivative  instruments  and  does not
currently  engage in hedging  activities,  the adoption of SFAS No. 133 and SFAS
No. 138 will not have a material impact on the Company's  consolidated financial
position or  consolidated  results of operations.  SFAS No. 133 and SFAS No. 138
are effective for the Company beginning August 1, 2000.

         In December 1999, the Securities and Exchange  Commission  issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101").  The Company is required to adopt the provisions of SAB 101 no later than
December 31, 2000. Based on the revenue  recognition policy of the Company,  the
adoption of SAB 101 will not have a material  impact on the Company's  financial
position or results of operations.

                                       14
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

                         REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
SONUS CORP.:

         We have audited the accompanying  consolidated  balance sheets of Sonus
Corp.  and  subsidiaries  as  of  July  31,  2000  and  1999,  and  the  related
consolidated statements of operations,  shareholders' equity, and cash flows for
each  of the  years  in  the  three-year  period  ended  July  31,  2000.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sonus Corp. and  subsidiaries as of July 31, 2000 and 1999, and the consolidated
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended July 31, 2000 in conformity with accounting  principles
generally accepted in the United States of America.

                                            /s/ KPMG LLP



Portland, Oregon
November 13, 2000


                                       15
<PAGE>

<TABLE>

                                          SONUS CORP.
                                  CONSOLIDATED BALANCE SHEETS
                               (in thousands, except share data)


                                                                           July 31,
                                                               ----------------------------
                                                                   2000            1999
                                                               -------------    -----------

                                             ASSETS
<S>                                                                   <C>             <C>
Current assets:
     Cash and cash equivalents                                 $        788     $       498
     Accounts receivable, net of allowance for doubtful accounts
       of $1,391 and $907, respectively, and reserve for aged
       receivables of $2,300 and $0, respectively                     6,359           3,666
     Other receivables                                                1,497             346
     Inventory                                                          952             499
     Prepaid expenses                                                   396             340
                                                               -------------    ------------
                Total current assets                                 9,992           5,349

Property and equipment, net                                           8,090           6,208
Other assets                                                             24              60
Goodwill and covenants not to compete, net                           19,678          19,768
                                                               -------------    ------------
                                                               $     37,784     $    31,385
                                                               =============    ============

                              LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Note payable-related party                                $        ---     $       500
     Accounts payable                                                 5,460           3,727
     Accrued payroll                                                  1,643           1,223
     Other accrued liabilities                                        1,441           1,317
     Convertible notes payable                                          ---             931
     Capital lease obligations, current portion                         289             129
     Long-term debt, current portion                                  2,176           2,150
                                                               -------------    ------------
                Total current liabilities                            11,009           9,977

Capital lease obligations, less current portion                         181              96
Long-term debt, less current portion                                  1,078           2,497
                                                               -------------    ------------
                Total liabilities                                    12,268       12,570
                                                               -------------    ------------
Commitments and contingencies

Shareholders' equity:
     Series A convertible preferred stock, no par
      value per share, 2,666,666 shares authorized,
      issued, and outstanding (liquidation preference of $20,340)    15,701          15,701
     Series B convertible preferred stock, no par
      value per share, 2,500,000 shares authorized,
      issued, and outstanding in 2000 (liquidation preference
      of $10,667)                                                     9,860             ---
     Common stock, no par value per share, unlimited
      number of shares authorized, 6,098,706 issued
      and outstanding (6,109,026 in 1999)                            14,916          14,976
     Notes receivable from shareholders                                 (93)            (93)
     Accumulated deficit                                            (14,696)        (11,595)
     Accumulated other comprehensive loss                              (172)           (174)
                                                               -------------    ------------
                Total shareholders' equity                           25,516          18,815
                                                               -------------    ------------
                                                               $     37,784     $    31,385
                                                               =============    ============

                  See accompanying notes to consolidated financial statements.
</TABLE>


                                       16
<PAGE>

<TABLE>

                                                   SONUS CORP.
                                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                      (in thousands, except per share data)


                                                                             Years ended July 31,
                                                                ----------------------------------------------
                                                                    2000            1999              1998
                                                                ------------    ------------      ------------
<S>                                                             <C>             <C>               <C>
Revenues:
     Product                                                    $    37,252     $    29,044       $    18,792
     Service                                                          3,589           3,392             3,311
     Other                                                            3,118           1,323               265
                                                                ------------    ------------      ------------
     Net revenues                                                    43,959          33,759            22,368

Costs and expenses:
     Cost of products sold                                           12,887          10,766             7,712
     Clinical expenses                                               19,885          17,795            12,297
     Provision for aged receivables                                   2,300             ---               ---
     General and administrative expenses                              8,778           7,583             5,896
     Depreciation and amortization                                    3,109           2,450             1,361
                                                                ------------    ------------      ------------
Total costs and expenses                                             46,959          38,594            27,266
                                                                ------------    ------------      ------------
Loss from operations                                                 (3,000)         (4,835)           (4,898)

Other income (expense):
      Interest income                                                   260             261               452
      Interest expense                                                 (342)           (300)             (149)
      Other, net                                                        (19)            (10)                1
                                                                ------------    ------------      ------------
Net Loss                                                        $    (3,101)    $    (4,884)      $    (4,594)
                                                                ============    ============      ============
Net loss per share of common stock:

    Basic and diluted                                           $     (0.51)    $     (0.80)      $     (0.89)

Weighted average shares outstanding:

    Basic and diluted                                                 6,083           6,090             5,160



                          See accompanying notes to consolidated financial statements.
</TABLE>

                                       17
<PAGE>

                                   SONUS CORP.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)


<TABLE>
                                                       Preferred stock-Series A  Preferred stock - Series B       Common stock
                                                       ------------------------  --------------------------       ------------
                                                          Shares        Amount      Shares      Amount         Shares       Amount
                                                          ------        ------      ------      ------         ------       ------

<S>                                                      <C>          <C>         <C>          <C>          <C>           <C>
BALANCE AT JULY 31, 1997                                       ---    $    ---         ---         ---      5,427,657     $ 11,098
  Net loss                                                     ---         ---         ---         ---            ---          ---
       Foreign currency translation adjustment                 ---         ---         ---         ---            ---          ---
 Comprehensive loss                                            ---         ---         ---         ---            ---          ---

  Stock issued upon conversion
      of convertible note                                      ---         ---         ---         ---         25,925          128
  Stock issued in connection with acquisition
      contingent upon satisfaction of certain
      conditions                                               ---         ---         ---         ---         22,936          ---
  Repurchase of common stock                                   ---         ---         ---         ---         (3,000)         (25)
  Proceeds from exercise of stock options                      ---         ---         ---         ---         10,000            9
  Stock issued in connection with Series A
      convertible preferred stock, net of
      costs of $2,299                                    2,666,666      15,701         ---         ---            ---          ---
  Proceeds from exercise of warrants                           ---         ---         ---         ---        373,998        1,957
  Proceeds from exercise of stock options                      ---         ---         ---         ---          2,400           18
  Advance on shareholder note                                  ---         ---         ---         ---            ---          ---
  Stock issued upon conversion
      of convertible notes                                     ---         ---         ---         ---        220,000        1,430
  Payment of cash in lieu of fractional shares                 ---         ---         ---         ---             (8)         ---
                                                         ---------    --------    ---------    -------      ---------     --------
BALANCE AT JULY 31, 1998                                 2,666,666      15,701         ---         ---      6,079,908       14,615
  Net loss                                                     ---         ---         ---         ---            ---          ---
       Foreign currency translation adjustment                 ---         ---         ---         ---            ---          ---
 Comprehensive loss                                            ---         ---         ---         ---            ---          ---

  Proceeds from exercise of warrants                           ---         ---         ---         ---         39,799          248
  Repurchase of common stock                                   ---         ---         ---         ---        (10,680)         (90)
  Repayment on shareholder notes                               ---         ---         ---         ---            ---          ---
  Payment of cash in lieu of fractional shares                 ---         ---         ---         ---             (1)         ---
  Stock options granted to non-employees                       ---         ---         ---         ---            ---          203
                                                         ---------    --------    ---------    -------      ---------     --------
BALANCE AT JULY 31, 1999                                 2,666,666      15,701         ---         ---      6,109,026       14,976
  Net loss                                                     ---         ---         ---         ---            ---          ---
       Foreign currency translation adjustment                 ---         ---         ---         ---            ---          ---
 Comprehensive loss
  Stock issued in connection with Series B
      convertible preferred stock, net of costs of $140        ---         ---    2,500,000      9,860            ---          ---
  Repurchase of common stock                                   ---         ---         ---         ---        (10,320)         (86)
  Stock options granted to non-employees                       ---         ---         ---         ---            ---           26
                                                         ---------    --------    ---------    -------      ---------     --------
BALANCE AT JULY 31, 2000                                 2,666,666    $ 15,701    2,500,000    $ 9,860      6,098,706     $ 14,916
                                                         =========    ========    =========    =======      =========     ========

                                                                                  Accumulated
                                                        Shareholder                  other                          Total
                                                           notes     Accumulated  comprehensive   Comprehensive  shareholders'
                                                        receivable     deficit    income (loss)   income (loss)     equity
                                                        ----------     -------    -------------   -------------     ------

<S>                                                      <C>          <C>           <C>            <C>            <C>
BALANCE AT JULY 31, 1997                                      (124)   $ (2,117)     $    (22)                     $   8,835
  Net loss                                                     ---      (4,594)          ---       $  (4,594)        (4,594)
       Foreign currency translation adjustment                 ---         ---          (207)           (207)          (207)
                                                                                                   ---------
 Comprehensive loss                                            ---         ---                     $  (4,801)           ---
                                                                                                   =========
  Stock issued upon conversion
      of convertible note                                      ---         ---           ---                            128
  Stock issued in connection with acquisition
      contingent upon satisfaction of certain
      conditions                                               ---         ---           ---                            ---
  Repurchase of common stock                                   ---         ---           ---                            (25)
  Proceeds from exercise of stock options                      ---         ---           ---                              9
  Stock issued in connection with Series A
      convertible preferred stock, net of
      costs of $2,299                                          ---         ---           ---                         15,701
  Proceeds from exercise of warrants                           ---         ---           ---                          1,957
  Proceeds from exercise of stock options                      ---         ---           ---                             18
  Advance on shareholder note                                 (159)        ---           ---                           (159)
  Stock issued upon conversion
      of convertible notes                                     ---         ---           ---                          1,430
  Payment of cash in lieu of fractional shares                 ---         ---           ---                            ---
                                                         ---------    --------      ---------                     ---------
BALANCE AT JULY 31, 1998                                      (283)     (6,711)         (229)                        23,093
  Net loss                                                     ---      (4,884)          ---       $  (4,884)        (4,884)
       Foreign currency translation adjustment                 ---         ---            55              55             55
                                                                                                   ---------
 Comprehensive loss                                            ---         ---           ---       $  (4,829)           ---
                                                                                                   =========
  Proceeds from exercise of warrants                           ---         ---           ---                            248
  Repurchase of common stock                                   ---         ---           ---                            (90)
  Repayment on shareholder notes                               190         ---           ---                            190
  Payment of cash in lieu of fractional shares                 ---         ---           ---                            ---
  Stock options granted to non-employees                       ---         ---           ---                            203
                                                         ---------    --------      ---------                     ---------
BALANCE AT JULY 31, 1999                                       (93)    (11,595)         (174)                        18,815
  Net loss                                                     ---      (3,101)          ---       $  (3,101)        (3,101)
       Foreign currency translation adjustment                 ---         ---             2               2              2
                                                                                                   ---------
 Comprehensive loss                                                                                $  (3,099)
                                                                                                   =========
  Stock issued in connection with Series B
      convertible preferred stock, net of costs of $140        ---         ---           ---                          9,860
  Repurchase of common stock                                   ---         ---           ---                            (86)
  Stock options granted to non-employees                       ---         ---           ---                             26
                                                         ---------    --------      ---------                     ---------
BALANCE AT JULY 31, 2000                                 $     (93)   $(14,696)     $   (172)                     $  25,516
                                                         =========    ========      =========                     =========
</TABLE>
          See accompanying notes to consolidated financial statements.
                                       18
<PAGE>
<TABLE>


                                                    SONUS CORP.
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (in thousands)


                                                                            Years ended July 31,
                                                                ----------------------------------------------
                                                                    2000            1999              1998
                                                                ------------    ------------      ------------

Cash flows from operating activities:
<S>                                                             <C>             <C>               <C>
     Net loss                                                   $    (3,101)    $    (4,884)      $    (4,594)
     Adjustments to reconcile net loss to net cash
      used in operating activities:
          Bad debt expense                                              391             389               412
          Provision for aged receivables                              2,300            ---               ---
          Depreciation and amortization                               3,109           2,450             1,361
          Compensation cost for options granted
           to non-employees                                              26             203              ---
     Changes in operating assets and liabilities,
      net of effects of acquisitions:
          Accounts receivable                                        (4,971)           (554)              (51)
          Other receivables                                          (1,141)            172              (181)
          Inventory                                                    (447)            560              (405)
          Prepaid expenses                                              (56)            (59)               24
          Accounts payable and accrued liabilities                    1,839            (558)            1,231
                                                                ------------    ------------      ------------
            Net cash used in operating activities                    (2,051)         (2,281)           (2,203)
                                                                ------------    ------------      ------------
Cash flows from investing activities:

     Maturity (purchase) of short-term investments                      ---           6,408            (6,408)
     Purchase of property and equipment                              (3,305)         (3,368)           (1,414)
     Additional costs related to acquisitions                           ---            (188)             (198)
     Deferred acquisition costs and other, net                           37              88                (1)
     Net cash used in business acquisitions                            (438)         (2,062)           (3,765)
                                                                ------------    ------------      ------------
            Net cash provided by
            (used in) investing activities                           (3,706)            878           (11,786)
                                                                ------------    ------------      ------------
Cash flows from financing activities:

     Net repayments of long-term debt
      and capital lease obligations                                  (3,236)        (1,626)            (1,625)
     Deferred financing costs, net                                      ---              3                (20)
     Net advances (repayments) of bank loans and short-term
      notes payable                                                    (500)           454                (39)
     Advances from (payments to) shareholders                           ---            190               (159)
     Issuance of common stock for cash, net of costs                    ---            248              1,984
     Issuance of preferred stock for cash, net of costs               9,860            ---             15,701
     Acquisition of treasury stock                                      (86)           (90)               (25)
                                                                ------------    ------------      ------------
          Net cash provided by (used in) financing activities         6,038           (821)            15,817
                                                                ------------    ------------      ------------

Net change in cash and cash equivalents                                 281         (2,224)             1,828
Effect on cash and cash equivalents of changes in
 foreign translation rate                                                 9              2               (207)
Cash and cash equivalents, beginning of year                            498          2,720              1,099
                                                                ------------    ------------      ------------
Cash and cash equivalents, end of year                          $       788     $      498        $     2,720
                                                                ============    ============      ============
Supplemental disclosure of
  non-cash investing and financing activities:
  Interest paid during the year                                 $       353     $      218        $       149
  Non-cash financing activities:
     Issuance and assumption of debt in acquisitions                    573          2,611              1,781
     Acquisition of clinical equipment and computer hardware with
      capital lease obligations                                         566            ---                ---
     Issuance of common stock upon conversion of convertible note       ---            650                ---
     Issuance of debt for covenants not to compete with purchase        ---            ---              1,557


                          See accompanying notes to consolidated financial statements.
</TABLE>

                                       19
<PAGE>



                                   SONUS CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JULY 31, 2000 AND 1999

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         DESCRIPTION OF COMPANY

         Sonus Corp., a Yukon  Territory,  Canada  corporation  (the "Company"),
through  its  primary  operating  subsidiaries,  Sonus-Canada  Ltd.,  a  British
Columbia,  Canada corporation,  Sonus-USA,  Inc., a Washington corporation,  and
Sonus-Texas,  Inc.,  an Oregon  corporation,  owns and operates 106 hearing care
centers in the United States and Western Canada.  The centers are located in the
states of Arizona, California, Illinois, Michigan, Missouri, New Mexico, Oregon,
Texas,  and Washington,  and in the Canadian  provinces of British  Columbia and
Alberta.  Each of the  Company's  hearing  care  centers  provides  its  hearing
impaired patients with a full range of audiological  products and services.  The
Company  intends to expand its  network of  hearing  care  centers by  acquiring
centers in its existing,  as well as new, geographic  markets.  The Company also
operates a franchise  licensing program called The Sonus Network,  with over 430
current  locations.  Licensees  are  entitled  to use the Sonus name and receive
other  benefits such as practice  management  advice and training,  group buying
discounts,  and marketing services. The Company,  through its subsidiary Hear PO
Corp., a New Mexico corporation,  also obtains contracts to provide hearing care
benefits to managed care group and corporate health care  organizations  through
its approximately 1,400 affiliated  audiologists and sells Hear PO brand private
label hearing instruments.

         PRINCIPLES OF CONSOLIDATION

         The  consolidated  financial  statements  include the Company's  wholly
owned subsidiaries. All significant inter-company accounts have been eliminated.
The  functional  currency of the Company's  Canadian  operations is the Canadian
dollar while the  functional  currency of the Company's  U.S.  operations is the
U.S.  dollar.  In accordance  with Statement of Financial  Accounting  Standards
("SFAS") No. 52, "Foreign Currency Translation", assets and liabilities recorded
in Canadian  dollars are remeasured at current rates in existence at the balance
sheet date.  Revenues  and expenses are  remeasured  using the weighted  average
exchange rate for the period.  Exchange gains and losses from  remeasurement  of
assets and  liabilities  recorded in Canadian  dollars are treated as unrealized
gains and losses and reported as a separate component of shareholders' equity.

         REVENUE RECOGNITION

         Revenues from the sale of hearing instrument products are recognized at
the time of delivery.  Revenues  from the  provision of hearing care  diagnostic
services are recognized at the time that such services are performed.

         INCOME TAXES

         The Company  accounts  for income  taxes under the asset and  liability
method.  Under  the  asset  and  liability  method,   deferred  tax  assets  and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards.  Deferred tax assets and  liabilities  are measured using enacted
tax rates  expected  to apply to  taxable  income  in the  years in which  those
temporary  differences  are expected to be  recovered or settled.  The effect on
deferred tax assets and  liabilities  of a change in tax rates is  recognized in
income in the period that includes the enactment date. A valuation  allowance is
established  when necessary to reduce deferred tax assets to the amount expected
to be realized.

         CASH AND CASH EQUIVALENTS

         Cash equivalents consist of short-term,  highly liquid investments with
original maturities of 90 days or less.

         SHORT-TERM INVESTMENTS

         Short-term  investments consist of  available-for-sale  securities,  as
defined by SFAS No. 115,  "Accounting for Certain Investments in Debt and Equity
Securities".  Under  SFAS No.  115,  unrealized  holding  gains and  losses  are
reflected as a net amount in a separate component of shareholders'  equity until
realized.  At July 31, 2000 and 1999, the Company had no short-term  investments
and

                                       20
<PAGE>

therefore no unrealized holding gains or losses. Gross realized gains and losses
on sales of  available-for-sale  securities for fiscal 2000, 1999, and 1998 were
nominal.  Realized  gains and  losses  are  computed  by  determining  cost on a
specific identification basis.

         Gross  proceeds  from  sales  and   maturities  of   available-for-sale
investments during fiscal 2000, 1999, and 1998 were $11,001,000, $6,408,000, and
$18,511,000, respectively.

         ACCOUNTS RECEIVABLE

         The Company  establishes  the allowance for doubtful  accounts based on
historical  charge-offs of accounts receivable.  During fiscal 2000, the Company
also  established  a  reserve  for aged  receivables  based on the  aging of the
accounts  receivable  and other  factors,  which in the  opinion of  management,
deserve current recognition.

         INVENTORY

         Inventory primarily consists of hearing instruments, hearing instrument
batteries,  and assistive  listening  devices and is stated at the lower of cost
(first in, first out) or net realizable value.

         PROPERTY AND EQUIPMENT

         Property and equipment are recorded at cost and  depreciated  using the
straight-line method over the following useful lives:

         Professional equipment                              Seven years
         Office equipment                                    Five years
         Computer equipment and software                     Five years

         Property and equipment purchased under capitalized leases and leasehold
improvements are amortized over the shorter of the lease term or their estimated
useful lives and such depreciation is included with depreciation expense.

         ADVERTISING EXPENSE

         The Company defers its  advertising  costs until the  advertisement  is
actually run, at which time the full expense is recognized. Deferred advertising
costs  were  $60,000  and  $84,000  at July  31,  2000 and  1999,  respectively.
Advertising  expense was  $4,004,000,  $3,632,000,  and $2,786,000 for the years
ended July 31, 2000, 1999, and 1998, respectively.

         GOODWILL AND COVENANTS NOT TO COMPETE

         The  unallocated  purchase  costs in excess of the net assets  acquired
(goodwill)  is being  amortized on the  straight-line  basis over twenty  years.
Non-compete  agreements are amortized on the straight-line basis over the period
benefited. Goodwill and covenants not to compete are as follows as of July 31:

                  (in thousands)                       2000              1999
                                                       ----              ----
                  Goodwill                           $20,970           $19,774
                  Covenants not to compete             2,311             2,226
                  Less:  Accumulated amortization     (3,603)           (2,232)
                                                     --------           -------
                                                     $19,678           $19,768
                                                     ========          ========

         Amortization  charged to operations  was  $1,386,000,  $1,195,000,  and
$635,000 for the years ended July 31, 2000, 1999 and 1998, respectively.

         DEFERRED ACQUISITION AND FINANCING COSTS

         Costs  related to the  acquisition  of centers are deferred  and,  upon
successful completion of acquisitions,  are allocated to the assets acquired and
are  subject  to the  accounting  policies  outlined  above.  Costs  related  to
potential  acquisitions  that are  unsuccessful  are  expensed in the periods in
which it is determined  that such  acquisitions  are unlikely to be consummated.
Costs  related  to issuing  shares are  deferred  and upon the  issuance  of the
related shares, are applied to reduce the net proceeds of the issue.

         IMPAIRMENT OF LONG-LIVED ASSETS

         The Company assesses the recoverability of long-lived assets, including
goodwill,  by determining  whether the carrying  amount of the long-lived  asset
over its remaining life can be recovered through  undiscounted  projected future
cash flows.  The Company has not  recognized  any  impairment  losses during the
years ended July 31, 2000, 1999, and 1998.

                                       21
<PAGE>

         NET LOSS PER SHARE

         On August 1, 1997,  the Company  adopted  SFAS No. 128,  "Earnings  Per
Share", which provides that "basic net income (loss) per share" and "diluted net
income  (loss)  per share"  for all  periods  presented  be  computed  using the
weighted  average  number of common  shares  outstanding  during the  respective
period,  with diluted net income per share  including the effect of  potentially
dilutive common shares. The following potential common shares have been excluded
from the  computation  of  diluted  net loss per share  for the years  presented
because the effect would have been anti-dilutive:

<TABLE>
                                                                   Years Ended July 31,
                                                                   --------------------
                                                            2000            1999           1998
                                                            ----            ----           ----
<S>                                                     <C>             <C>          <C>
(in thousands)
Shares issuable under stock options and warrants            4,263           3,629        2,001
Shares  issuable upon  conversion  of  convertible
notes payable                                                  47             153          382
Shares  of  convertible  preferred  stock on an as
converted basis                                             4,743           2,667        1,600

</TABLE>
         COMPREHENSIVE INCOME (LOSS)

         Comprehensive  income (loss)  consists of net income (loss) and foreign
currency translation  adjustment and is presented in the consolidated  statement
of shareholders'  equity.  SFAS No. 130 requires only additional  disclosures in
the  consolidated  financial  statements;  it  does  not  affect  the  Company's
financial position or results of operations.

         STOCK BASED COMPENSATION

         The Company  accounts for its stock plans in  accordance  with SFAS No.
123, "Accounting for Stock-Based  Compensation",  which establishes a fair value
method of  accounting  for stock plans.  As allowed by SFAS No. 123, the Company
has elected to continue to apply Accounting Principles Board Opinion ("APB") No.
25,  "Accounting for Stock Issued to Employees",  which  prescribes an intrinsic
value based  method of  accounting  for stock plans  covering  employees  and to
provide the pro-forma  disclosures  of the effects of SFAS No. 123 on net income
(loss) and net income (loss) per share.

         In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation"  ("FIN  44"),  which  provides  interpretive  guidance  on several
implementation  issues  related to Accounting  Principles  Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company adopted FIN 44 effective
July 1,  2000.  The  adoption  of FIN 44 did not have a  material  impact on the
consolidated financial statements for the year ended July 31, 2000.

         CONCENTRATIONS OF CREDIT RISK

         Financial  instruments,   which  potentially  subject  the  Company  to
concentration of credit risk,  consist  principally of cash and cash equivalents
and trade  receivables.  The Company  places its cash with high  credit  quality
institutions.  At times,  such  amounts may be in excess of the Federal  Deposit
Insurance  Corporation insurance limits. The Company's trade accounts receivable
are derived from numerous private payers, insurance carriers, health maintenance
organizations and government agencies.  Concentration of credit risk relating to
trade accounts receivable is limited due to the diversity and number of patients
and payers.

         FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  carrying  value  of  financial  instruments  such as cash and cash
equivalents,  accounts  receivable,  other  receivables,  trade payables,  notes
payable,  and convertible notes payable  approximate their fair value because of
the short-term nature of these instruments. The carrying amount of the Company's
long-term debt  approximates  fair value because the interest rates  approximate
the rates that management believes are currently  available to the Company.  The
carrying amount of capital lease obligations approximates fair value.

                                       22
<PAGE>

         USE OF ESTIMATES

         The  preparation of financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities  and the disclosure of contingent  assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

NOTE 2.  ACQUISITIONS

         During the fiscal year ended July 31,  2000,  the  Company  acquired 16
hearing care centers in 10 transactions. Each transaction was accounted for as a
purchase.  The acquired assets and liabilities  were recorded at their estimated
fair values at the date of  acquisition,  and the  unallocated  excess  purchase
price  (goodwill) is being amortized on a straight line basis over 20 years. The
operating  results of each  acquisition  have been included in the  consolidated
statements of operations  from the  respective  acquisition  date. The aggregate
purchase  price for the  acquisitions  consisted  of cash  payments of $438,000,
promissory notes issued by the Company of $521,000  generally payable over three
years, and $85,000 in assumed liabilities. As a result of the acquisitions,  the
Company  recorded  approximately  $6,000 in inventory,  $157,000 in property and
equipment,  $10,000 in other assets,  and $795,000 in goodwill,  which  included
costs related to acquisitions, and $85,000 for covenants not to compete.

         During the fiscal year ended July 31,  1999,  the  Company  acquired 31
hearing care centers in 17 transactions. Each transaction was accounted for as a
purchase.  The acquired assets and liabilities  were recorded at their estimated
fair values at the date of  acquisition,  and the  unallocated  excess  purchase
price  (goodwill) is being amortized on a straight line basis over 20 years. The
operating  results of each  acquisition  have been included in the  consolidated
statements of operations  from the  respective  acquisition  date. The aggregate
purchase  price for the  acquisitions  consisted of cash payments of $1,704,000,
promissory  notes  issued by the Company of  $1,749,000  generally  payable over
three  years,  and  $900,000  in  assumed  liabilities.   As  a  result  of  the
acquisitions, the Company recorded approximately $95,000 in accounts receivable,
$90,000 in  inventory,  $457,000 in  property  and  equipment,  $20,000 in other
assets,   and   $3,700,000  in  goodwill,   which   included  costs  related  to
acquisitions.  In  addition  to the  purchase  price for the  acquisitions,  the
Company also recorded  $299,000 for  covenants not to compete,  of which $79,000
was paid in cash at the time of  closing,  with the balance  payable  over three
years.

         The following  unaudited pro forma financial  information  reflects the
historical  operations  of the Company and the hearing care centers  acquired by
the Company  during the fiscal  year ended July 31,  2000 (the  "Acquisitions").
Such financial  information has been prepared for comparative  purposes only and
is not necessarily  indicative of the Company's  combined  financial position or
the results of operations that actually would have occurred if the  Acquisitions
had been  consummated  on August 1, 1998. In addition,  such  information is not
intended to be a projection of results of operations that may be obtained by the
Company in the future.

                                                             YEAR ENDED JULY 31,
                                                             -------------------
                                                                 (Unaudited)
         (in thousands,
         except per share amounts)                            2000        1999
                                                              ----        ----

         Net revenues                                      $45,813      $37,809

         Net loss                                           (3,044)      (4,686)

         Net loss per share (basic and diluted)              (0.50)       (0.77)

                                       23
<PAGE>

NOTE 3.  PROPERTY AND EQUIPMENT

         Property and equipment consist of the following as of July 31:

         (in thousands)                                  2000         1999
                                                         ----         ----
         Professional equipment                         $2,695       $2,154
         Office equipment                                1,155          926
         Leasehold improvements                          1,599        1,030
         Computer equipment and software                 6,941        4,689
                                                       -------       -----
                                                        12,390        8,799
         Less accumulated depreciation                  (4,300)      (2,591)
                                                       -------       -------
                                                        $8,090       $6,208
                                                        ======       ======


NOTE 4.  CONVERTIBLE NOTES PAYABLE

         At July 31, 1999, the Company had outstanding  promissory  notes in the
amount of $931,000  convertible at any time into 143,000 Common Shares at a rate
of $6.50 per share.  The notes were paid in full during  November  and  December
1999, along with interest of $37,848.

NOTE 5.  CAPITAL LEASES

The  following  is a schedule by year of future  minimum  lease  payments  under
capital leases together with the present value of the net minimum lease payments
as of July 31, 2000 (in thousands):

     2001.................................................................$322
     2002...............................................................   200
                                                                         -----
     Total minimum lease payments........................................  522
     Less:  amount representing interest.................................  (52)
                                                                         -----
     Present value of minimum lease payments...........................    470
     Less current portion.................................................(289)
                                                                         -----
                                                                          $181
                                                                         =====

Total assets under  capitalized  leases at July 31, 2000 and 1999, were $462,000
and  $112,000,  net  of  accumulated  depreciation  of  $573,000  and  $375,000,
respectively.

                                       24
<PAGE>

NOTE 6.  LONG-TERM DEBT

         Long-term debt consists of the following as of July 31 (in thousands):
<TABLE>
<S>                               <C>                                                     <C>            <C>
                                                                                            2000          1999
                                                                                            ----          ----
         Installment  notes incurred in connection with  acquisitions
         payable in monthly  installments due from 2001 to 2004 with a weighted
         average interest rate of 6.9%, partially secured by purchased assets...........$   292       $    460

         Installment notes incurred in connection with acquisitions  payable
         in quarterly installments due from 2001 to 2002 with a weighted
         average interest rate of 6.5%, partially secured by purchased assets...........    249            517

         Installment notes incurred in connection with acquisitions payable in annual
         installments due from 2000 to 2005 with a weighted
         average interest rate of 6.2%, partially secured by purchased assets............ 1,733          2,167

         Non-interest bearing installment obligations for covenants not to compete
         due from 2000 to 2003 (net of discount of $41), partially
         secured by assets purchased in related acquisitions............................    350            637

         Equipment loans from suppliers with interest rates from 7.8% to 18% per annum
         due 2000 to 2003, secured by equipment.........................................    299            366

         Working capital loan from a supplier with floating interest rate of prime
         plus3/4% due 2001, secured by certain accounts receivable.......................    331           500
                                                                                         -------       -------

                                                                                          3,254          4,647
           Less current portion......................................................... (2,176)        (2,150)
                                                                                         ------       ---------
                                                                                        $ 1,078       $  2,497
                                                                                        =======       ========
</TABLE>

Annual  maturities  of  long-term  debt are as follows  (in  thousands):  2001 -
$2,176; 2002 - $699; 2003 - $386; 2004 - $17; 2005 - $16.

NOTE 7.  LINE OF CREDIT

         In July 2000,  Sonus-USA,  Inc. and  Sonus-Texas,  Inc.  entered into a
$2,000,000  revolving line of credit  agreement with a commercial bank. The line
of credit  matures on June 30, 2001, and bears interest at the bank's prime rate
plus 1/2%, or 10% at July 31, 2000. The amount available for borrowing under the
line of  credit  was  $2,000,000  at July 31,  2000,  and  there  was no  amount
outstanding  at that  date.  The  line of  credit  is  secured  by all  accounts
receivable,  inventory, chattel paper and general intangibles of Sonus-USA, Inc.
and  Sonus-Texas,  Inc. At July 31, 2000, the Company was in compliance with all
financial covenants under the line of credit.

NOTE 8.  SHAREHOLDERS' EQUITY

         SERIES A CONVERTIBLE PREFERRED SHARES

         The Company has 2,666,666  Series A Convertible  Preferred  Shares (the
"Series A Shares") outstanding.  The Company originally issued 13,333,333 Series
A Shares in a private  placement in December 1997. A one-for-five  reverse split
(consolidation)  of the Series A Shares was effected in January 2000. All Series
A Share amounts have been restated to reflect the  one-for-five  reverse  split.
The following summarizes certain terms of the Series A Shares:

         VOTING  RIGHTS.  Each  Series A Share is  entitled to one vote (or such
other  number of votes  equal to the  number of Common  Shares  into  which such
Series A Share  shall be  convertible  from  time to  time) in the  election  of
directors and any other matters presented to the shareholders of the Company for
action or consideration.

         DIVIDENDS.  Each Series A Share is entitled to receive, when, as and if
declared by the board of  directors of the Company out of the  Company's  assets
legally  available for payment,  cumulative  dividends from the date of original
issuance,  payable  annually at a rate of 5% per annum on a base amount of $6.75
per share  (the  "Base  Amount").  As of July 31,  2000,  cumulative  undeclared
dividends  amounted to  $2,340,000.  All accrued  and unpaid  dividends  will be
forfeited  upon the  conversion  of the Series A Shares.  The  dividend  rate is
subject to increase on specified dates in the event that certain conditions (the
"Triggering  Conditions")  have not been met. The  Triggering  Conditions are as
follows:

                                       25
<PAGE>

     (a) The  Common  Shares  are  listed on the New York  Stock  Exchange,  the
American Stock Exchange,  or the Nasdaq National Market (each a "U.S.  Principal
Market");

         (b) The Common Shares are traded on a U.S.  Principal Market at a daily
closing price greater than $8.00 per Common Share on each of the ten consecutive
trading days preceding the applicable date; and

         (c) The Company's  net income  before  income  taxes,  dividends on the
Series A Shares,  and  amortization of goodwill and covenants not to compete for
the three consecutive  fiscal quarters  preceding the applicable date shall have
averaged at least $0.22 per fully diluted  Common Share per fiscal  quarter (for
purposes  of making  this  calculation,  the  Common  Shares  issuable  upon the
exercise of warrants  issued in connection  with the Series A Shares will not be
counted).

         If the Triggering Conditions have not been met by:

         (1) January 1, 2003, the dividend rate will thereafter be 15% per annum
of the Base Amount;

         (2) January 1, 2004, the dividend rate will thereafter be 18% per annum
of the Base Amount; or

         (3) January 1, 2005, the dividend rate will thereafter be 21% per annum
of the Base Amount.

         As soon as the Triggering Conditions have been satisfied,  the dividend
rate will revert to 5% per annum of the Base Amount.

         LIQUIDATION  PREFERENCE.  In the event of any voluntary or  involuntary
liquidation,  dissolution, or winding up of the Company subject to the rights of
holders of any  securities of the Company  ranking senior to the Series A Shares
upon  liquidation,  the  holders of Series A Shares will be entitled to receive,
out of the assets of the Company  available for  distribution  to  shareholders,
before any  distribution  of assets is made to  holders of Common  Shares or any
other  securities  ranking  junior to the Series A Shares  upon  liquidation,  a
liquidating  distribution  in an amount  equal to the  greater  of (i) $6.75 per
share plus any accrued and unpaid  dividends  or (ii) the amount that would have
been  distributable  to such holders if they had converted their Series A Shares
into  Common  Shares  immediately  prior to such  dissolution,  liquidation,  or
winding  up,  plus any  accrued  and  unpaid  dividends.  The sale,  conveyance,
mortgage,  pledge or lease of all or substantially all the assets of the Company
will  be  deemed  to be a  liquidation  of  the  Company  for  purposes  of  the
liquidation rights of the holders of Series A Shares.  After payment of the full
amount of the liquidating  distribution to which they are entitled,  the holders
of  Series A Shares  will  have no right to any of the  remaining  assets of the
Company.

         OPTIONAL  REDEMPTION.  The Series A Shares may not be  redeemed  before
December 24, 2002. Thereafter, the Series A Shares may be redeemed at the option
of the  Company,  in whole or in part.  The  redemption  price will be an amount
equal to the  greater  of (i)  $6.75  per  share  plus any  accrued  and  unpaid
dividends or (ii) the fair market value of a Series A Share as  determined  by a
nationally  recognized  independent  investment  banking firm selected by mutual
agreement of the Company and the holder of a majority of the outstanding  Series
A Shares.  The Series A Shares are not subject to  mandatory  redemption  or any
sinking fund provisions.

         CONVERSION RIGHTS. The Series A Shares may be converted at any time, in
whole or in part, at the option of the holder thereof,  into Common Shares.  The
conversion  rate is  presently  equal to one Common Share for every one Series A
Share  surrendered  for  conversion.  The conversion  rate is subject to further
adjustment  for stock  dividends,  stock  splits,  recapitalizations,  and other
anti-dilution  adjustments.  Upon the  conversion  of any  Series A Shares,  any
accrued and unpaid dividends with respect to such shares will be forfeited.  The
Company has the right to force conversion of the Series A Shares, in whole or in
part, upon satisfaction of certain conditions.

         SERIES B CONVERTIBLE PREFERRED SHARES

         On October 1, 1999, the Company issued  2,500,000  Series B Convertible
Preferred Shares (the "Series B Shares") in a private  placement for $10,000,000
in cash. The following summarizes certain terms of the Series B Shares:

         VOTING  RIGHTS.  Each  Series B Share is  entitled to one vote (or such
other  number of votes  equal to the  number of Common  Shares  into  which such
Series B Share  shall be  convertible  from  time to  time) in the  election  of
directors and any other matters presented to the shareholders of the Company for
action or consideration.

         DIVIDENDS.  Cash  dividends  will  accrue on the  Series B Shares at an
annual rate of 8% of the conversion price then in effect until November 1, 2004,
increasing in steps thereafter to 18% beginning November 1, 2006,  provided that
the Company has met specified quarterly earnings targets. If the Company has not
met the  earnings  targets  by July 31,  2002,  dividends  will not accrue or be
payable  on the  Series B Shares.  As of July 31,  2000,  cumulative  undeclared
dividends  amounted to $667,000.  Upon  conversion  of the Series B Shares,


                                       26
<PAGE>


any accumulated dividends will be forfeited.

         LIQUIDATION  PREFERENCE.  In the event of any voluntary or  involuntary
liquidation,  dissolution, or winding up of the Company subject to the rights of
holders of any  securities of the Company  ranking senior to the Series B Shares
upon  liquidation,  the  holders of Series B Shares will be entitled to receive,
out of the assets of the Company  available for  distribution  to  shareholders,
before any  distribution  of assets is made to  holders of Common  Shares or any
other  securities  ranking  junior to the Series B Shares  upon  liquidation,  a
liquidating  distribution  in an  amount  equal to the  conversion  rate then in
effect  multiplied by (i) the  conversion  price then in effect plus any accrued
and unpaid  dividends or (ii) the amount that would have been  distributable  to
such  holders if they had  converted  their  Series B Shares into Common  Shares
immediately  prior to such  dissolution,  liquidation,  or winding  up, plus any
accrued  and unpaid  dividends,  whichever  is  greater.  The sale,  conveyance,
mortgage,  pledge or lease of all or substantially all the assets of the Company
will  be  deemed  to be a  liquidation  of  the  Company  for  purposes  of  the
liquidation rights of the holders of Series B Shares.  After payment of the full
amount of the liquidating  distribution to which they are entitled,  the holders
of  Series B Shares  will  have no right to any of the  remaining  assets of the
Company. The Company will be prohibited from paying cash dividends to holders of
Common Shares unless the accumulated  dividends on the Series B Shares have been
paid in full.

         OPTIONAL  REDEMPTION.  The Series B Shares may not be  redeemed  before
October 1, 2004.  Thereafter,  the Series B Shares may be redeemed at the option
of the  Company,  in whole or in part.  The  redemption  price will be an amount
equal to the  conversion  rate then in effect  multiplied by (i) the  conversion
price then in effect  plus any  accrued  and unpaid  dividends  or (ii) the fair
market  value  of a  Series B Share as  determined  by a  nationally  recognized
independent  investment banking firm selected by mutual agreement of the Company
and the holder of a majority of the  outstanding  Series B Shares,  whichever is
greater.  The Series B Shares are not  subject to  mandatory  redemption  or any
sinking fund provisions.

         CONVERSION  RIGHTS.  Until  October 31,  2000,  the Series B Shares are
convertible  at the option of the holder on a one-for-one  basis into  2,500,000
Common Shares.  Because the Company's receivables as of July 31, 1999, that were
collected by July 31, 2000, totaled less than $4,736,000 and the Company has not
yet attained  specified  quarterly  earnings  targets,  the conversion  rate was
adjusted such that the Series B Shares are  convertible  into  3,722,375  Common
Shares as of the fiscal quarter ended October 31, 2000.  The conversion  rate is
also subject to adjustment for stock dividends, stock splits, recapitalizations,
and other  similar  events.  In addition,  until the Company  attains  specified
quarterly  earnings  targets,  the  conversion  rate will  increase  each fiscal
quarter.  The amount of such quarterly  adjustments will be based on a factor of
2% of the original  purchase price plus the sum of all prior  adjustments  until
November 1, 2004,  increasing in steps thereafter to 4.5% beginning  November 1,
2006.  Once  the  Company  has met  the  specified  earnings  targets  for  four
consecutive fiscal quarters,  no further adjustments in the conversion rate will
be made.  The Series B Shares are subject to mandatory  conversion at the option
of the Company if certain share price and earnings targets are met.

         SHARE PURCHASE WARRANTS

         The  Company  has  outstanding   share  purchase   warrants  issued  in
connection  with the Series A Shares to purchase  2,000,000  Common Shares at an
exercise  price of $6.75 per share until October 1, 2004.  The Company may force
the exercise of the warrants upon satisfaction of all the Triggering Conditions,
except that the  Company's  net income  before  income  taxes,  dividends on the
Series A Shares  and the  Series B Shares,  and  amortization  of  goodwill  and
covenants not to compete for the three consecutive fiscal quarters preceding the
applicable  date shall have  averaged at least $0.35  instead of $0.22 per fully
diluted Common Share per fiscal quarter.

         In August 1998,  the Company  issued  39,799 Common Shares at $6.25 per
share in  connection  with the  exercise of share  purchase  warrants  issued in
September and December 1996.

         STOCK OPTION PLANS

         The Company has two stock  option  plans,  the Stock Option Plan ("1993
Plan") and the Second Amended and Restated  Stock Award Plan ("1996 Plan").  The
Company may grant to officers,  directors,  employees and consultants  incentive
and  non-qualified  options to purchase up to 2,500,000  Common Shares under the
1996 Plan. There are options to purchase 245,000 Common Shares outstanding under
the 1993 Plan;  no further  options  will be  granted  under the 1993 Plan.  The
exercise  price of options  granted under the 1996 Plan may not be less than 75%
of the fair market  value of the  Company's  Common  Shares at the date of grant
(100% for tax-qualified incentive stock options).  Options become exercisable at
the date of grant or in equal annual  installments  over a period of one to four
years from the date of grant.  The options  generally  expire either five or ten
years after the date of grant.

         The 1996 Plan also provides for the grant of stock appreciation rights,
restricted units,  performance awards and other stock-based  awards. The Company
had no such awards or rights outstanding at July 31, 2000 or 1999.

                                       27
<PAGE>

<TABLE>

         The activity during the years ended July 31 was as follows:

                                                  2000                        1999                         1998
                                                  ----                        ----                         ----
                                                      WEIGHTED                   WEIGHTED                     WEIGHTED
                                                          -                          -                            -
                                                       AVERAGE                    AVERAGE                     AVERAGE
                                                      EXERCISE                   EXERCISE                     EXERCISE
                                         OPTIONS        PRICE         OPTIONS      PRICE        OPTIONS         PRICE
                                         -------        -----         -------      -----        -------         -----

<S>                                       <C>           <C>            <C>           <C>             <C>         <C>
Outstanding - beginning of year           2,028,000     $6.74          1,560,000     $7.54           488,400     $6.41
   Granted                                  853,000      5.20            655,000      5.56         1,138,000      8.12
   Exercised                                     --       --                  --       --           (12,400)      2.10
   Canceled                               (387,000)      7.09          (187,000)      8.70          (54,000)      9.79
                                          ---------                    ---------                    -------
Outstanding - end of year                 2,494,000      6.16          2,028,000      6.74         1,560,000      7.54
                                          =========                    =========                   =========

Exercisable at end of year                1,160,953      6.41            808,441      6.54           363,200      5.98

Weighted-average fair value of
   options granted during the year                       3.42                         4.26                        8.38
</TABLE>

         During the year ended July 31, 2000, the Company cancelled 55,000 stock
options with a  weighted-average  exercise price of $6.00 per share and reissued
55,000 stock options with a weighted-average  exercise price of $5.08 per share.
The reissued  stock options have a remaining  contractual  life of 9.9 years and
are accounted for using  variable  accounting  until  exercised,  forfeited,  or
expire unexercised.

         The  following  table  summarizes   information   about  stock  options
outstanding at July 31, 2000:
<TABLE>

                                       OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE

                      -------------------------------------------------------   -------------------------------------

                                              WEIGHTED-       WEIGHTED
                      NUMBER OUTSTANDING       AVERAGE           -             NUMBER            WEIGHTED -
                                              REMAINING        AVERAGE       EXERCISABLE           AVERAGE
     RANGE OF               AS OF            CONTRACTUAL      EXERCISE          AS OF             EXERCISE
  EXERCISE PRICES       JULY 31, 2000           LIFE           PRICE         JULY 31, 2000           PRICE
--------------------  ---------------  ----------------  ------------      ------------------    ---------------
<S>   <C>     <C>                 <C>           <C>                    <C>                 <C>                <C>
  $1.00 --$2.00            60,000             0.39              $1.28                  60,000            $ 1.28
    2.01-- 3.50            25,000             0.54               3.36                  25,000              3.36
    3.51-- 5.00           475,000             9.44               4.16                 113,451              4.17
    5.01-- 6.50           993,000             7.14               5.95                 395,502              6.06
    6.51-- 8.00           682,400             6.26               6.97                 405,700              7.01
    8.01-- 9.50            96,000             3.30               8.66                  80,000              8.76
   9.51 --12.00           162,600             7.51              10.70                  81,300             10.70
----------------  -------------------  ----------------  ------------         ---------------    ---------------

   $1.00--$12.00        2,494,000             6.98              $6.16               1,160,953            $ 6.41
                       ==========                                                  ==========
</TABLE>

         No compensation cost has been recognized for the Company's stock option
grants to employees under APB No. 25. Total  compensation cost recognized in the
statements of operations for options granted to non-employees under SFAS No. 123
during the years ended July 31, 2000,  1999 and 1998, was $26,000, $203,000 and
$0,  respectively.  Pro forma  information  regarding  net income (loss) and net
income (loss) per share is required  under SFAS No. 123 and has been  determined
as if the Company had accounted for all 2000,  1999 and 1998 stock option grants
based on the fair value method. The pro forma information presented below is not
representative  of the effect  stock  options  will have on pro forma net income
(loss) or net income (loss) per share for future years.

         The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes  multiple  option-pricing  model. The following weighted
average  assumptions  were used for grants in 2000,  1999,  and 1998:  risk-free
interest rates of 6.04%, 5.92% and 5.5%,  respectively;  an expected option life
of 9.59 years, 9.60 years and 7.69 years,  respectively;  expected volatility of
106%, 90% and 114%, respectively; and dividend yield of zero.

                                       28
<PAGE>


         The  Black-Scholes  method is one of many models used to calculate  the
fair value of options that are freely tradable, fully transferable and that have
no  vesting   restrictions.   These  models  also  require   highly   subjective
assumptions,  including  future stock price  volatility  and expected time until
exercise, which greatly affect the calculated values.

         Had compensation cost for these plans been determined based on the fair
value of awards at the grant date,  as  prescribed by SFAS No. 123, net loss and
net loss per share would have been as follows:
<TABLE>

                                                                      2000            1999            1998
                                                                      ----            ----            ----
                                                                     (in thousands, except per share data)

           Net loss applicable to common shareholders:
<S>                                                                  <C>          <C>             <C>
               As reported                                         $(3,101)       $(4,884)        $(4,594)
               Pro forma (1)                                       $(5,897)       $(6,176)        $(5,988)
           Net loss per share (basic and diluted):
               As reported                                          $(0.51)        $(0.80)         $(0.89)
               Pro forma (1)                                        $(0.97)        $(1.01)         $(1.16)
</TABLE>

(1) SFAS No. 123  applies to awards  granted  in fiscal  years that begin  after
December 15, 1994. Consequently, the effects of applying SFAS No. 123 shown here
are not likely to be  representative  of the effects in future  years due to the
exclusion of awards granted in prior years but vesting (and therefore  expensed)
in fiscal 1998, 1999, and 2000.

  NOTE 9.  INCOME TAXES

         Sonus Corp. and its Canadian  subsidiary file separate corporate income
tax  returns  on  a  stand-alone  basis  in  Canada.  Sonus-USA,  Inc.  and  its
subsidiaries file corporate income tax returns in the United States. There is no
provision for income taxes for the years ended July 31, 2000, 1999, and 1998, as
the Company incurred net operating losses.

         A reconciliation of the Company's expected tax benefit using the United
States  federal  statutory  income tax rate to the actual  effective  rate is as
follows:

                                                     2000       1999    1998
                                                     ----       ----    ----
Tax benefit at statutory rate                         (34)%      (34)%  (34)%
Adjustment for higher Canadian tax rate                 1         --     (1)
Expenses not deductible for tax purposes                7          5      3
State taxes, net of federal                            (6)        (5)    (5)
Change in valuation allowance impacting
statement of operations                                32         34      37
                                                       --         --      --
Tax rate per financial statements                     ---%       ---%    ---%
                                                      ===        ===     ===




         The components of temporary  differences  that give rise to significant
portions of deferred income taxes are as follows at July 31 (in thousands):
<TABLE>

                                                             2000      1999        1998
                                                             ----      ----        ----
<S>                                                          <C>       <C>        <C>
     Deferred tax assets:
      Net operating loss carryforwards                     $ 5,371  $  4,754     $ 2,698
      Allowance for doubtful accounts                        1,462       364         277
      Capitalized financing costs                              473       694         980
      Other                                                    135        32          15
                                                            ------    ------      -------
                                                             7,441     5,844       3,970
     Deferred tax liabilities:
       Property and equipment due to
        differences in depreciation                           (609)      (83)        ---
       Goodwill and start-up costs                            (368)     (305)       (240)
                                                            -------   -------     -------
                                                             6,464     5,456       3,730
     Less valuation allowance                              $(6,464) $ (5,456)    $(3,730)
                                                            -------   -------     -------
                                                              ----      ----        ----
                                                            =======   =======     =======
</TABLE>

                                       29
<PAGE>

         At July 31,  2000,  the  Company had  approximate  net  operating  loss
carryforwards for tax purposes which, if not utilized, expire in the years ended
as follows (in thousands):

                           CANADA        UNITED STATES          TOTAL

2001                          $16            $ ---               $16
2002                           25              ---                25
2003                          429              ---               429
2004                          238              ---               238
2005                          655              ---               655
2006                          482              ---               482
2007                          548              ---               548
2009                          ---               24                24
2010                          ---               29                29
2011                          ---              656               656
2012                          ---              781               781
2013                          ---            3,932             3,932
2019                          ---            4,515             4,515
2020                          ---              910               910
                           ------          -------           -------
                           $2,393          $10,847           $13,240
                           ======          =======           =======

         A provision of the Internal  Revenue Code requires that the utilization
of net  operating  losses  be  limited  when  there is a change  of more than 50
percent in ownership of the Company.  Such a change  occurred in December  1997.
This ownership change may limit the utilization of any United States federal net
operating losses incurred prior to the change in ownership date.

NOTE 10.  RELATED PARTY TRANSACTIONS

         Gregory J. Frazer,  Ph.D., an officer and director of the Company,  and
Mr.  Frazer's  wife  were   shareholders  in  certain  Hearing  Care  Associates
corporations  that the Company  acquired  during the fiscal years ended July 31,
1998 and 1997.  During the fiscal year ended July 31, 1999, the Company issued a
three-year  promissory  note to Mr. Frazer in the principal  amount of $102,000,
payable in equal  quarterly  installments,  in connection  with  purchase  price
adjustments for hearing care centers  previously  acquired from Mr. Frazer.  The
Company also entered into expanded  non-compete  agreements  with Mr. Frazer and
his wife that pay them a total of $10,758 per month until  September  2001.  For
the fiscal year ended July 31, 1998,  the  consideration  paid to Mr. Frazer and
his  wife in  connection  with  the  acquisitions  and  related  non-competition
agreements  consisted  of $242,179 in cash and $80,520  payable in  installments
over three years.

         Mr.  Frazer and his wife have the right,  until  September 30, 2001, to
require the Company to redeem an aggregate of 1,680 of their Common Shares as of
the last  day of each  calendar  quarter  at a price of  $8.35  per  share.  The
redemption rights are noncumulative and expire if not exercised as of the end of
any calendar quarter as to such quarter. Pursuant to such redemption rights, the
Corporation  redeemed  during the fiscal  years ended July 31, 2000 and 1999,  a
total of 5,040 and 6,720 Common  Shares,  respectively,  from Mr. Frazer and his
wife for consideration of $42,084 and $56,112, respectively.

         On May 8, 1997,  Brandon M.  Dawson,  an officer  and  director  of the
Company,  exercised  options  for 50,000  Common  Shares at $1.35 per share.  In
connection  with the exercise,  the Company made loans of $67,500 and $91,000 to
Mr. Dawson on May 8, 1997, and April 24, 1998, respectively, to allow Mr. Dawson
to pay the  aggregate  exercise  price of the  options  and taxes  incurred as a
result of the  exercise.  The  loans,  which  bore  interest  at 10% and  7.75%,
respectively,  were repaid on July 6, 1999,  along with interest of $16,077.  On
October 5, 1997, the Company  loaned Mr. Dawson  $85,000 in connection  with the
purchase of his  residence.  The loan was repaid on April 10,  1998,  along with
interest at 10% per annum in the amount of $4,308.  On December  26,  1997,  the
Company  loaned Mr. Dawson  $29,187 in order to allow Mr. Dawson to repay a loan
obtained in  connection  with the exercise of options to purchase  20,000 Common
Shares.  The loan was repaid on March 30, 1999, along with interest at 7.75% per
annum in the amount of $4,287.  On March 19, 1998, the Company loaned Mr. Dawson
$32,272, in order to pay taxes incurred as a result of option exercises in April
1996. The current  balance of the loan,  which matures on December 31, 2000, and
bears interest at 7.75% per annum, is $35,760.

         On December 8, 1998, the Corporation  loaned Scott E. Klein,  President
and Chief  Operating  Officer of the Company,  $100,000 in  connection  with the
purchase of his primary residence in Portland,  Oregon.  The loan, which was due
on the earlier of the sale of Mr. Klein's  residence in Minnesota or October 31,
1999,  was repaid on June 7, 1999,  along with  interest  at 8% in the amount of
$4,000.

         On July 21, 1999, Cindy Dawson-Austin, mother of Mr. Dawson, loaned the
Company $500,000 for working  capital.  The loan, along with interest at 12% per
annum in the amount of $23,342, was repaid on December 10, 1999.

                                       30
<PAGE>

         In  April  1999,  Mr.  Dawson  purchased  from  an  unrelated  party  a
convertible note in the principal amount of $492,693 that had been issued by the
Company in October  1996.  The note was repaid on December 10, 1999.  See Note 4
"Convertible Notes Payable."

NOTE 11.  401(K) PLAN

         The Company sponsors a 401(k) plan for all employees who have satisfied
minimum  service and age  requirements.  Employees  may  contribute up to 20% of
their   compensation   to  the  plan.   The  Company  does  not  match  employee
contributions.

NOTE 12.  COMMITMENTS AND CONTINGENCIES

           OPERATING LEASES

         The following is a schedule by year of future  minimum  lease  payments
for non-cancelable operating leases at July 31, 2000 (in thousands):

          Year ending July 31:
          --------------------
           2001                                             $2,039
           2002                                              1,565
           2003                                              1,134
           2004                                                790
           2005                                                292
           Thereafter                                          221
                                                          --------
           Total minimum lease payments                     $6,041
                                                          ========

         Rental expense under operating leases was $2,528,000,  $2,236,000,  and
$1,426,000 for the years ended July 31, 2000, 1999, and 1998, respectively.

           CONTINGENT PAYMENTS

         The terms of certain of the Company's  acquisition  agreements  provide
for additional  consideration  to be paid if the acquired  entity's  revenues or
results  of  operations   exceed   certain  target   levels.   Such   additional
consideration is paid in cash and is recorded when earned as additional purchase
price.  The maximum amount of contingent  consideration  that the Company may be
required to pay is $294,000 for fiscal 2001 and $507,000 thereafter.

           CLAIMS

         The Company is a party to various lawsuits and claims incidental to its
business.  In the  opinion of  management,  the  ultimate  disposition  of these
matters  will not have a  material  adverse  effect on the  Company's  financial
position, results of operations, or liquidity.

NOTE 13.  SEGMENT INFORMATION

         The Company  adopted  SFAS No. 131  "Disclosures  about  Segments of an
Enterprise and Related  Information" during fiscal 1999. In accordance with SFAS
No.  131,  the  Company  has  identified  one  operating  segment:  the sale and
servicing  of  hearing  instruments  and the  provision  of  audiology  services
primarily to individual consumers. No customer constituted more than 5% of total
revenues. Revenues by country were as follows for the years ended July 31:

         (in thousands)              2000        1999         1998
                                     ----        ----         ----
         United States              $40,353    $30,511     $19,498
         Canada                       3,606      3,248       2,870
                                     ------    -------       -----
         Total                      $43,959    $33,759     $22,368
                                    =======    =======     =======

                                       31
<PAGE>


NOTE 14.  SUBSEQUENT EVENTS

         In August and  October of 2000,  the  Company  acquired 4 hearing  care
centers in 4 transactions  for a total  purchase price of $122,000.  The Company
has paid  $11,000  of the total  purchase  price in cash,  with  $25,000  due in
January  2001 and the  remainder  over a 3-year  period.  Each  transaction  was
accounted for as a purchase.

  NOTE 15.  CANADIAN VERSUS U.S. GAAP

         As of July 31, 2000, 1999, and 1998 there were no material  differences
between Canadian  generally  accepted  accounting  principles  ("GAAP") and U.S.
GAAP.



                                       32
<PAGE>

SUPPLEMENTARY DATA:  QUARTERLY   RESULTS  OF  OPERATIONS   (UNAUDITED)

         The  following is a tabulation of the  unaudited  quarterly  results of
operations  for the years ended July 31,  2000,  1999,  and 1998 (in  thousands,
except per share data):
<TABLE>

                                                            Quarter ended
                                       --------------------------------------------------------
                                       October 31,     January 31,     April 30,       July 31,
                                           1999           2000           2000            2000
                                           ----           ----           ----            ----

<S>                                     <C>           <C>             <C>              <C>
Net revenues                            $ 10,142       $ 10,494      $  12,083       $  11,240
Income (loss) from operations               (531)          (454)            86          (2,101)
Net income (loss)                           (585)          (445)           111          (2,182)

EBITDA (1)                                   167            273            842          (1,173)

Net income (loss) per share (basic)     $  (0.10)      $  (0.07)     $    0.02       $   (0.36)
Net income (loss) per share (diluted)   $  (0.10)      $  (0.07)     $    0.01       $   (0.36)

                                                            Quarter ended
                                       --------------------------------------------------------
                                       October 31,     January 31,     April 30,       July 31,
                                           1998           1999           1999            1999
                                           ----           ----           ----            ----

Net revenues                            $  7,701       $  8,486       $  9,093       $   8,479
Income (loss) from operations             (1,523)          (701)            75          (2,686)
Net income (loss)                         (1,474)          (699)            65          (2,776)

EBITDA (1)                                (1,048)          (187)           637          (1,787)

Net income (loss) per share (basic
 and diluted)                           $  (0.24)      $  (0.11)      $   0.01       $   (0.46)


                                                            Quarter ended
                                       --------------------------------------------------------
                                       October 31,     January 31,     April 30,       July 31,
                                           1997           1998           1998            1998
                                           ----           ----           ----            ----

Net revenues                            $  5,307       $  4,109        $ 5,719       $   7,233
Loss from operations                         (79)        (1,135)          (778)         (2,906)
Net loss                                     (96)        (1,085)          (581)         (2,832)
EBITDA(1)                                    198           (812)          (429)         (2,494)

Net loss per share (basic and diluted)  $  (0.02)       $ (0.24)       $ (0.10)      $   (0.49)
</TABLE>

---------------
(1)  "EBITDA" is defined as income (loss) from operations plus  depreciation and
     amortization  and is  provided  because  it is a measure  commonly  used by
     acquisition  companies.  It is presented to enhance an understanding of the
     Company's  operating  results and is not intended to represent cash flow or
     results of operations  in accordance  with  generally  accepted  accounting
     principles for the periods indicated.

ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         Not applicable.

                                       33
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Information with respect to the directors and executive officers of the
Company and compliance with Section 16(a) of the Securities Exchange Act of 1934
is  incorporated  herein by reference  to the  Company's  definitive  Management
Information  Circular and Proxy  Statement  dated  November 16, 2000 (the "Proxy
Statement"),  under the headings "Section 16(a) Beneficial  Ownership  Reporting
Compliance" and "2. Election of Directors."

ITEM 10. EXECUTIVE COMPENSATION

         The required  information  is  incorporated  herein by reference to the
Proxy Statement under the heading "Executive Compensation."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The required  information  is  incorporated  herein by reference to the
Proxy Statement under the heading "Share Ownership By Principal Shareholders and
Management."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The required  information  is  incorporated  herein by reference to the
Proxy Statement under the heading "Compensation Committee Interlocks and Insider
Participation."

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits  are  listed  in the  Exhibit  Index on page 36 of this
report. Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this  report is marked with an asterisk in the Exhibit
Index.

         (b)  Reports  on Form 8-K.  No  reports  on Form 8-K were  filed by the
Company during the last quarter of the fiscal year ended July 31, 2000.


                                       34
<PAGE>
                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Date: November 13, 2000                SONUS CORP.
                                      By
                                                  /s/ Brandon M. Dawson
                                         --------------------------------------
                                                  Brandon M. Dawson
                                          Chairman  and Chief Executive Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities indicated as of November 13, 2000.

             SIGNATURE                         TITLE
             ---------                         -----
   /s/ Brandon M. Dawson      Chairman and Chief Executive Officer and Director
   ---------------------
   Brandon M. Dawson

   /s/ Scott Klein            President and Chief Operating Officer and Director
   ----------------------
   Scott Klein

   /s/ Paul C. Campbell       Senior Vice President and Chief Financial Officer
   --------------------       (Principal Financial Officer)
   Paul C. Campbell

   /s/ Douglas A. Pease       Controller
   ---------------            (Principal Accounting Officer)
   Douglas A. Pease


A MAJORITY OF OTHER DIRECTORS:

                   *JOEL ACKERMAN                    Director

             *HAYWOOD D. COCHRANE, JR.               Director

                 * LESLIE H. CROSS                   Director

                *HUGH T. HORNIBROOK                  Director

                 *DAVID J. WENSTRUP                  Director


/s/ Scott Klein
--------------------------------
*By Scott Klein, as attorney-in-fact


                                       35
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT                       DESCRIPTION OF EXHIBIT
------                        ----------------------

              3.1  Articles of  Incorporation  of the Company.  Incorporated  by
                   reference to Exhibit 3.1 to the  Company's  Annual  Report on
                   Form  10-KSB  for the fiscal  year  ended July 31,  1999 (the
                   "1999 Form 10-KSB").

              3.2  Bylaws of the Company.  Incorporated  by reference to Exhibit
                   3.2 to the Company's  quarterly report on Form 10-QSB for the
                   quarter ended January 31, 1999.

              10.1 Securities   Purchase   Agreement  between  the  Company  and
                   Warburg, Pincus Ventures, L.P. ("Warburg") dated November 21,
                   1997.  Incorporated  by  reference  to  Exhibit  99.2  to the
                   Company's current report on Form 8-K filed November 25, 1997.

              10.2 Securities Purchase Agreement between the Company and Warburg
                   dated October 1, 1999. Incorporated by reference to Exhibit 4
                   to the Company's current report on Form 8-K filed October 12,
                   1999.

              10.3 Amended and Restated  Warrant  Agreement  between the Company
                   and Warburg  dated October 1, 1999,  and related  Amended and
                   Restated   Warrant   Certificate   dated   October  1,  1999.
                   Incorporated  by  reference  to Exhibit 10.3 to the 1999 Form
                   10-KSB.

              10.4 Form  of  Convertible   Subordinated  Note.  Incorporated  by
                   reference to Exhibit 10.4 to the 1999 Form 10-KSB.


              10.5   1993  Stock  Option  Plan.  Incorporated  by  reference  to
                     Exhibit  10.26 to the Company's  Registration  Statement on
                     Form SB-2 filed  March 12, 1997 (File No.  333-23137)  (the
                     "SB-2).*

              10.6   Second  Amended and  Restated  Stock Award Plan (as amended
                     February 11, 2000).*

              10.7   Employment   Agreement  dated  October  1,  1996,   between
                     Sonus-USA, and Gregory J. Frazer. Incorporated by reference
                     to Exhibit 10.28 to the SB-2.*

              10.8   Employment  Agreement dated December 24, 1997,  between the
                     Company and Brandon M. Dawson. Incorporated by reference to
                     Exhibit  10.30 to  Post-Effective  Amendment  No. 1,  filed
                     March 5, 1998 to the SB-2.*

              10.9   Employment  Agreement  dated October 30, 1998,  between the
                     Company  and Scott  Klein.  Incorporated  by  reference  to
                     Exhibit  10.1 to the  Company's  quarterly  report  on Form
                     10-QSB for the quarter ended October 31, 1998.*

              10.10  Employment  Agreement dated February 11, 2000,  between the
                     Company and Paul C. Campbell.  Incorporated by reference to
                     Exhibit 10 to the Company's quarterly report on Form 10-QSB
                     for the quarter ended January 31, 2000.*

              10.11  Consulting  Agreement  effective  as of  January  1,  1997,
                     between the Company and Hugh T. Hornibrook. Incorporated by
                     reference to Exhibit 10.33 to the SB-2.*

              10.12  Promissory  Note of Brandon M. Dawson dated March 19, 1998,
                     as  amended,  and  related  Pledge  Agreement  between  the
                     Company and Mr. Dawson, dated May 1, 1998.  Incorporated by
                     reference to Exhibit 10.11 to the 1999 Form 10-KSB.*

              10.13  Noncompetition  Agreement  dated January 25, 1999,  between
                     Sonus-USA,  Inc.  and Gregory J.  Frazer.  Incorporated  by
                     reference to Exhibit 10.15 to the 1999 Form 10-KSB.

              10.14  Amendment  Agreement effective as of August 1, 1998, by and
                     between Sonus-USA, Inc. and Gregory J. Frazer. Incorporated
                     by reference to Exhibit 10.16 to the 1999 Form 10-KSB.

              21     The  Company's   subsidiaries   are   SONUS-USA,   Inc.,  a
                     Washington  corporation,  Sonus-  Canada  Ltd.,  a  British
                     Columbia (Canada) corporation, Sonus-Texas, Inc., an Oregon
                     corporation, and Hear PO Corp., a New Mexico corporation.

              23     Consent of KPMG LLP.

              24     Power of attorney of certain officers and directors.

              27     Financial Data Schedule.

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* Management contract or compensatory plan or arrangement.

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